Buying a House: What Expenses Will I Have to Pay Up Front?

If you're like many prospective homebuyers, you're saving up every penny. If you've started looking around the real estate market in the area where you'd like to buy, you might have a pretty good idea of how much down payment money you'll need, and how much you can afford to pay in monthly mortgage payments. But what about all the other expenses that normally come with buying a house? Many prospective homebuyers will have to spend serious cash before even moving into their new home.

In addition to the down payment money, you should plan for the upfront costs described below.

Closing Costs

On the day when your real estate purchase is completed and ownership is transferred, you will likely have to pay "closing costs." These are mostly associated with the costs of taking out a loan, and include everything from appraisal and credit-check fees to recording fees to loan points (each point is 1% of the loan principal). Closing costs usually total from 2% to 6% of the home loan amount.

For the logistics of paying the amount needed at the closing, see Home Buyers: What to Bring to Your Closing. (You might also be interested in reading Home Buyers: What Happens at the Closing and Home Buyers: What Documents to Expect at Your Close of Escrow.)

Homeowners' and Title Insurance Costs

Though the premiums might be combined with your loan closing costs, even homebuyers who pay all cash (with no mortgage loan) would be wise to purchase two types of insurance. This include both:

• homeowners' insurance (to protect against fire, theft, floods, earthquakes, and other hazards or damage), and
• title insurance (to protect against legal issues concerning the home's ownership and any liens against the property).

Also, if you are taking out a loan and are putting down less than 20% of the purchase price, your lender will require you to pay private mortgage insurance (PMI), typically up to 1% of the loan amount.

Homeowners' Association (HOA) Fees

If you are moving into a condo, townhome, or other community-based property, the HOA will likely collect a few months' worth of dues and assessments in advance, at the closing. These typically run in the hundreds if not thousands of dollars, depending on the size of your unit, the amenities offered by your HOA, and more. And even if the HOA doesn't charge fees in advance, your first month's payment is likely to come due all too soon!

(By the way, the HOA might also charge the seller a transfer fee.)

Moving Costs

The amount of your moving costs depend on how many miles away you're moving, how much stuff you have to pack and transport, and whether you hire a professional moving company. Six friends and a pickup truck might be an option (but in that case, at least plan to buy them all a round of pizza!).

You can save money by decluttering and downsizing before your move. (Here are tips for getting rid of stuff, and maybe even earning some money at it.) You might also pack at least some boxes on your own, even if using a moving company. Every cardboard box provided by professional movers costs money, not to mention labor hours. Too many people splurge for full-service movers, only to be reminded as they unpack that they never bothered to deal with the contents of their junk drawer; which is now waiting to be unpacked and dealt with.

Service Setup Costs

You will likely need to pay some fees to set up or transfer utilities and cable, Internet, or other services in your new home. Before the closing, try to arrange with the seller to not turn anything off; transferring services is much easier than restarting, and won't leave you sitting in the dark as you wait for the electricity to be restored.

Emergency Fund

It's a good idea (and sometimes a bank or lender requirement, assuming you've taken out a mortgage loan) to have a few months' worth of mortgage payments set aside, in case something unexpectedly goes wrong in your life. It's usually best to keep this in a separate bank account, where there's less temptation to draw on it.

Redecorating or Remodeling Costs

Depending on the home you buy and your current furnishings and budget, you might want to set aside cash to make your new home livable, comfortable, and beautiful. Most homebuyers find they need or want to do some nesting, for example by buying new curtains, furniture, rugs, or appliances. Buying secondhand can save money, but the treasure hunt can add more time than you want to wait.

For More Information

One way to reduce the financial hit is to look into whether any of your home purchase expenses lower your tax bill, now or in the future. See Home Purchase Costs You Can't Deduct or Add to Tax Basis.

And for detailed advice on figuring how the finances of buying a new home, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, J.D. and Attorney Ann O'Connell.