Woman Looking At a Mortgage Loan Application

What It Really Costs To Buy a Home

Updated March 28, 2024 . AmFam Team

Getting the numbers right before you buy a home is essential. But with closing costs, agent commissions and all the other expenses of home ownership, how do you know you’ve got it right? Check out our tips on what it really costs to own a home to find out.

When you buy a home, one of your main objectives is to save money by negotiating a fair purchase price. But the actual cost required to stay financially stable after you buy it can be hard to estimate.

By carefully examining the deal you’re negotiating, and other costs like property taxes and monthly fees, you can arrive at a rather accurate total cost. So, what does it really cost to buy a home? Below, we’ll help you understand the factors that go into answering that complicated question. This way, you’ll be able to crunch the numbers before you buy. And you’ll have a better understanding of where your money needs to be in order to make ends meet.

Expect to Pay Closing Costs Out-of-pocket

When applying for home loans, buyers sometimes overlook the fact that they will be responsible for paying closing costs. They soon realize that these are frequently out-of-pocket expenses that will likely not be recoverable like a down payment — because that helped to pay down the amount of the loan.

Most home buyers will pay about 2-5 percent of the total sale price of their new home in closing costs. This means that if you buy a $300,000 home, you can expect to pay anywhere from $6,000 to $15,000 in closing costs alone — in addition to the down payment. Note that you can seek out loan deals that have nominal or no closing fees, but you’ll likely wind up paying for these costs over the life of the loan.

Here is a sampling of what you can expect with closing costs:

Real estate agent commission. As discussed above, this major expense is folded into your closing fees.

Flood determination fee. This important service is performed to verify you’re not purchasing property that resides within a flood plain, or if you do — you’re aware of it.

Home inspection. After the seller’s agreed to your offer, you’ll hire a home inspector to review the various aspects of the home for issues, concerns and deal breakers.

Pest inspection. This fee is paid to a pest control specialist to assess your new purchase for signs of infestation.

Credit report fee. One of the first fees you’ll pay when applying for a home loan, this is usually a “pass through” fee that the credit bureaus charge the lender.

Title insurance and binder. These policies protect you and your mortgage lenders in the event that the current owner of the home doesn’t have a complete deed and/or authority to sell the property.

Title search. This fee is paid to perform a search in public records for data on the property.

Document preparation fee. These costs are sometimes charged by the lender to pay for preparing the loan paperwork and are typically negotiable.

Underwriting and origination fees. These charges are related with verifying, evaluating and processing the loan application.

Settlement fee. This typically-negotiable fee is paid to the agent or escrow holder.

Discount points. Also known as a “rate buydown,” this optional fee will only occur when you make an agreement with a lender to purchase a reduced annual percentage rate (APR) for the loan. Pricing depends on the amount that the APR is reduced. Real savings can be achieved, though these are best applied to mortgages where the purchaser plans on owning the property for at least seven years.

Appraisal fee. This fee is charged by your home appraiser, who will do a thorough review of the prospective home’s relative value.

Wire transfer fee. This fee is charged upon closing, and covers the cost of transferring the money from the lender to the seller’s bank to make the purchase.

Survey fee. This cost is charged by a professional survey team to validate or update the property’s boundaries.

Miscellaneous state and local fees. State tax stamps, certifications, local municipal processing fees may not add up to much on their own but they are an expense.

Recording fees. You’ll usually have to pay these because the buyer is forcing a legal ownership change in the deed to the property.

Attorney fees. Typically due at closing, this expense is likely a flat fee amounting to a few hundred dollars. Some states mandate that an attorney review and validate the process.

Mortgage insurance premium. Most lenders will require that your home’s first homeowners premium is paid in full at the time of closing.

Notary fee. In order to verify your and the seller’s identity, a notary may be required to stamp the documentation.

Prepaid interest fee. Your lender will require that you pay out the interest on the first month’s mortgage.

Home warranty. Although not usually required by the lender, purchasing a home warranty can help you avoid costly out-of-pocket expenses. If a covered major appliance should need replacement, you’ll only have to pay the deductible. You may be able to request the seller purchase this for you.

Private mortgage insurance fee. This monthly PMI fee is paid until you’ve paid out at least 20 percent of the equity of your home’s value. Depending on your down payment, this fee can persist for years.

Mortgage Payments and Calculating the Mortgage Interest Deduction

Although this figure may seem the most straightforward of all the expenses you’ll encounter when trying to determine the cost of home ownership, it’s not. That’s because frequently, you’ll get to deduct some or all of your mortgage interest when filing your federal taxes.

As your loan matures, you pay less interest and more on principal in monthly payments. Because those numbers are constantly shifting each month, it’s hard to pin down exactly how much you’ll be able to write off.

Check in with your accountant. Before you close, you can request that your accountant estimate the amount of interest you’ll be likely to deduct from the first year’s mortgage payments. This can help you to understand the true out-of-pocket cost of this expense.

Plan to pay down your mortgage with your interest deduction. By planning to make an extra payment towards the principal out of your mortgage interest deduction annually, you may be able to recapture thousands of dollars over the life of your loan.

How the Location of Your Home Impacts Your Finances

Suppose that your dream home is located on the outskirts of town, and the closest grocery store is 12 miles away. That 24 mile round trip will cost you fuel, wear and tear on your car — each time you make a trip.

Consider the economics of how your home’s location will force added spending if you’re required to drive to and from places you’ll go frequently. However, when you buy in an area with a high walk score, you’re more likely to bike to work — or walk to and from other local spots— and that can save you a lot of cash in the long run. Plus, it will help keep you in shape!

Consider Renting Versus Owning

The thought of home ownership can be alluring, but the odds may not be in your favor. Given your age and demographic you may be likely to move in the near future. Jobs open up or family issues call you to another city. Consider these factors when making the call on whether or not to buy.

Look at a comparison calculator. By working online with your estimated finances, plug the numbers you plan on spending into a rent vs. owning calculator (Opens in a new tab). By managing all the costs carefully, you may find your length of stay and available money point you towards one option over the other.

Consider rent increases. Although rent right now may be affordable, you may find steep inclines are in store for you in the coming years.

Interest rates can help steer your decision. With home prices on the rise, and higher than average interest rates, you may find renting is a smarter choice. The savings you retain over money spent required to buy can be reinvested into a portfolio which may outperform owning and the equity you could have gained. Electing for a fixed rate when purchasing has big long-term advantages.

Understand the local tax trends now. Getting a feel for property tax rates when buying is key. And it’s even more important to look at trends so you’ll be able to factor in future tax expenses.

Buying May Offer Long-term Benefits

Those “intangibles” that come with a home purchase can sometimes help you to make your decision. Having a stable place to call your own and raise a family is alluring on many levels. You’ll have an empty canvas on which you can paint your future. Because it’s one of the biggest investments you’ll ever make, it’s important to get the best homeowners insurance possible.

Reach out to your American Family Insurance Agent and schedule an appointment to go over your coverage needs and build a policy that works for you. In addition to the comfort you’ll find in owning your home, you’ll also walk away with the knowledge that all your hard work is well-protected.

Tools & Resources

Explore our tools and smart tips.