9 hidden costs of buying a home — and ways to avoid them

August 1, 2022
5 min read

The most expensive investment a person makes in their lifetime is most often a house. Many lenders require 20% down on a home before they’ll offer their more favorable mortgage rates. As of July 2022, the average house price in the U.S. hovers around $428,000. That means homeowners hoping to put 20% down will have to fork over a whopping $85,600.

Your down payment and subsequent mortgage are the obvious costs of purchasing a home, but hidden costs sneak up on buyers who already feel financially strained. Mortgage lender requirements, closing costs, and other lesser-known fees add up for homebuyers, especially those with little to no experience navigating the real estate market.

You’ll want to study the potential hidden costs of buying a home to better budget for your next home purchase. You won’t be taken by surprise when a hidden cost comes knocking — and you may even find a way to avoid certain unnecessary costs entirely.

Process costs

It takes an average of 45 days to close on a house. Several costs pile up within that nearly two-month window, including:

Earnest money

Earnest money acts as insurance for the seller in case you back out of the deal. It’s typically 1-3% of the home's total sale price and is due within three days of the seller accepting and signing your offer.

You forfeit your earnest money if you change your mind about buying the house. However, you’ll keep it if the seller backs out. You’ll also keep the money if the sale falls through due to a reason covered by a contingency. For example, if the home inspection fails and you have a due diligence contingency in place, your earnest money will be returned.

The good news: Your earnest money counts toward your down payment on your closing date.

Read more: Four common types of homebuying contingencies

Home appraisal fees

Your lender will want to ensure that the home you purchase is actually worth what the seller says it is. This requires a home appraisal, and (surprise!) you get to pay for it.

A designated appraisal management company (AMC) will appoint an appraiser to perform this duty, so it’s not something you can price shop. The total cost of your appraisal will depend upon several factors, including:

  • The size and value of the property
  • The type of mortgage you’re applying for
  • The property’s geographical location

Expect to pay at least $300 for an appraisal, but it could be closer to $1,000 depending on your situation.

Home inspection

Your lender won’t require a home inspection, but 85% of homebuyers still get one to avoid purchasing a house with serious structural issues. Home inspections save homeowners money on repairs in the long run, but scheduling one will cost you money upfront.

The factors that affect the cost of a home inspection mirror that of a home appraisal — namely, square footage, cost of living, and the state of the housing market. The costs between the two are similar as well, with prices averaging $300–$400 but often costing more depending on where you live and what you’re buying.

Closing costs

There’s nothing quite like sitting down to officially take possession on your closing date — and then finding out you weren’t prepared for the litany of closing costs. ClosingCorp pegs the average price of closing at $6,837 including taxes, which is a hefty bill if you’re not expecting it. These costs must be paid before you can take ownership of your house, so come to the table with your checkbook.

Loan origination fee

Your lender undergoes an intensive process to review, underwrite, and approve your mortgage — and the loan origination fee is what they charge for the work involved. Most loan origination fees cost 0.5% to 1% of the total loan rate, meaning you’ll owe a sizable $2,000-$4,000 on a $400,000 house at closing time. 

Homeowner’s insurance 

During your closing meeting, you’ll need to prove that you’ve protected your investment with a homeowners insurance policy. Lenders typically require you to have paid for a year of insurance before signing off on your mortgage. NerdWallet figures the average cost of homeowners insurance in the U.S. to be $1,784 a year, but the rates are higher in states with consistent rates of severe weather and natural disasters.

Property tax

You’ll also be expected to pay the property taxes on your new home as part of your closing costs. The amount you’ll pay is prorated based on how many months you’ll own the house for the current calendar year. For instance, if you close on May 1st, you’ll likely be on the hook for eight months-worth of property tax.

Your property tax bill will depend on two variables: the value of your new home and the going tax rate. The city, county, and state you live in all impact your tax rate. (For curious minds: as of 2020, Hawaii has the lowest property tax rate at .37%, while New Jersey ranks highest at 2.2%.) 

Escrow fees

Your escrow account is where your earnest money is held while all parties hash out the sales process. Down the line, your lender will use the account differently. They’ll put money into escrow from your mortgage every month and periodically use the funds to pay off your property taxes and homeowners insurance premiums. 

Your lender pulls funds from your escrow account, but a third-party escrow company manages and operates it. They don’t set it up for free, though, with companies usually charging 1-2% of the total sales price for their services. This cost is often split between the buyer and the seller, though these terms may be negotiated in favor of either party as part of the initial offer.

Situational costs

Other situations add to your overall homebuying cost depending on where and how you’re buying your house. These costs don’t apply to every purchase situation, which is why they often take homebuyers by surprise.

Homeowners association fees

You have to do more than join the club and follow the rules if you buy a house in a neighborhood governed by a homeowners association (HOA). You must also pay HOA fees to enjoy its benefits. 

There’s an additional cost that often catches homebuyers off guard: the HOA transfer fee. The HOA charges this fee to cover administrative costs whenever a home within the association changes possession. Most HOAs charge around $200-$250 for this fee, and the seller typically covers the cost. However, it’s become increasingly popular for the buyer to cover this fee to make their offer more attractive. Keep this fee in mind as a negotiation tactic if you’re buying in an especially hot market — and prepare to shell out for it if you include it as part of your final offer.

Mortgage insurance

Mortgage insurance offsets some of the risks a lender takes when it allows people to buy a house without substantial money down. Mortgage companies know that not everyone can afford a sizeable down payment for their homes, but small down payments equal more considerable risks for lenders. Lenders charge a small premium in the form of mortgage insurance instead of denying mortgages for cash-lacking prospective buyers.

Lenders usually require you to purchase private mortgage insurance (PMI) on a conventional mortgage loan when you put down less than 20% on your house. It shows up as a premium in your monthly mortgage cost, and you’ll typically pay it until you’ve paid off at least 20% of your home’s value. Meanwhile, those taking out Federal Housing Administration (FHA) loans without putting at least 10% down will pay a mortgage insurance premium (MIP) for their mortgage term. 

Most annual PMI and MIP rates average between 0.22% and 2.25% of your total cost spread out over monthly mortgage payments. NerdWallet has a handy tool that allows you to estimate the cost of your PMI based on factors like your total home value, down payment, and interest rate.

Lower the hidden costs of buying a home with Homeward

Homeward helps eliminate one of the highest costs of homebuying: buying a new house before selling your old one. When you find a new home on the market, waiting to sell your old one before making an offer is risky. Someone could snap up the home you want while you wait for your home to sell, but most people can’t afford to pay the mortgage on two houses simultaneously.

Additionally, many people simply can’t afford to purchase a new home until they’ve sold their old one. Their liquidity is locked up in their existing house, making it impossible for many homebuyers to put down 20% on a new home without selling first.

Buy before you sell allows you to buy your dream home and gives you time to sell your old home — without paying two mortgages. Once pre-qualified, Homeward will buy your new home for cash and let you move in for a low rental rate. Meanwhile, you can work to put your old house on the market and purchase your new home back from us once it sells. It’s that easy to save yourself stress and money as you make one of the most significant purchases of your life.

Simplify the homebuying process with Buy before you sell.

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