Everyone knows that buying a home costs money. But how much exactly? While the purchase price of the home makes up the largest component, here are other costs homebuyers should be prepared to pay:
This is essentially a down payment or deposit on your new home! It shows the seller that you are a serious buyer by putting some skin in the game, so to speak. Should you terminate your contract in good faith, you will get that money back. And should you make it to the closing table, the money will go towards your down payment. Earnest Money will typically be between 1%-3% of your purchase price, so make sure you have the funds readily available once you start writing offers!
This is the time to have a home’s nooks, crannies, roof, sewer, and so on inspected by a qualified home inspector. Home inspection pricing can vary from company to company, but you can typically plan for $300- $1,000 depending on the types of inspections you order (sewer, radon test, general inspection, etc.).
If you’re like 87% of buyers that are financing their home purchase with a mortgage, your lender will need an appraisal (Property Valuation) done on the home. This ensures that they are not loaning you more money than the house is worth. Price can vary depending on the company, but you can typically plan for $500-$750 for the appraisal report.
The amount of a down payment typically starts around 3% of the purchase price and goes as high as you are comfortable spending or can afford. Twenty percent down is the sweet spot, where you’re no longer required to pay Private Mortgage Insurance (at less than 20% down, you’ll pay for this). You’ll want to discuss your down payment options with your lender!
Closing Costs and Prepaids
The majority of your closing costs are charged by your lender for the financing of your new home. Every lender packages their fees differently, so be sure to have them explain every charge in detail to ensure you are comfortable with them. There will be prepaid items that will be required to set up your escrow account (three months of insurance and taxes), so that the account will be solvent to pay the first bills when they arrive to the escrow servicing company.
And Of Course, Commission
Your real estate broker should disclose their commission amount and how it is paid before you submit any offers. In Colorado, it’s pretty common for the listing broker to negotiate a commission with the seller, and then advertise a co-op fee to pay the buyer’s broker’s commission. In those instances, the amount you go under contract for is the amount you pay at the closing table. Your broker’s hard work will be rewarded from the closing proceeds and reduce the amount paid to the seller.
Budgeting for closing costs is an important part of your home purchasing game plan. Unanticipated expenses right before closing is never a fun problem to deal with!
By LYH broker Rhyan Diller
I’m often asked when the best time to buy is. There are always pros and cons to buying at any time of year, and while there is no exact answer, the best time is NOW.
Picture this. Leslie decides she’s ready to buy a home in the summer of 2019. She looks and looks and finds the perfect single-family home for $485,450 (the median sale price in Denver for August 2019). She puts down 5% and gets the average interest rate of 3.62%, and ends up with a monthly payment of around $2,730 per month.
Meanwhile, Ron is also thinking of buying a home in August of 2019, but he decides he wants to wait so that he can save up a bigger down payment for the ideal 20% down (which by the way, is not needed to buy!). Via his friend Leslie, Ron knows that most houses in August of 2019 are around $485,450, so he needs to save up $97,090 for his down payment. Easy! Right?
One year later, Leslie decides she wants to buy the identical house next door to her. She talks to her trusted realtor and learns that this identical house is for sale at $525,000 (the median sale price in Denver for August 2020). Confused, she asks why an identical house to hers is so much more now than when she bought one year ago.
Her realtor explains how the average home price has increased 8% since just last year! And then congratulates her, because the first house she owns already has almost $40,000 in equity — just for owning it for one year. She then learns that rates are now wildly low and refinances on her first house, taking advantage of the current 2.9% interest rates.
Meanwhile, Ron is still working on saving up $97,090, only to realize that to put 20% down, he now needs to save $105,000 (even though that’s not necessary), since the house he wanted last year is now $525,000. He paid upwards of $2,000 per month in rent in Denver, essentially helping to pay down someone else’s mortgage with no equity to be had.
We know buying a house in Denver is not easy. Most well-priced homes will sell in a matter of days, and you’ll likely be competing against multiple buyers for the “perfect” home. But if you’re waiting for the stars to align — for rates to drop even lower, for more inventory, to save for a higher down payment, or (our personal favorite) for the “bubble to burst,” you will continue missing out on earning an average of 8% year over year in appreciation for simply buying a home. No full remodel, no sweat equity, just ownership.
Source: the Colorado Real Estate Journal
The age old question, revisited: should I rent or should I buy? Here, the author presents statistics that illustrate Denver’s current preference of renting over buying. In the last 10 years, home prices have exceeded rental increases by 24%, requiring far less cash to execute a lease than to transfer a deed. But one thing to note: you don’t need to wait until you have 20% saved up to purchase a home — conventional home loans start with as little as 5% down! In fact, there are other loan products that can bring the down payment even lower.
Source: Tara Siegel Bernard of the New York Times
Throughout the US there are countless people who would love to buy a home, but continue to pay that rent check to their landlord every month instead. Why is this?
For the average aspiring homeowner, the largest obstacle to overcome is the down payment. Several companies, including San Francisco-based Unison, have found an opportunity in this challenge: shared equity.
Shared equity allows homeowners to split their down payment with an investor in exchange for a piece of the appreciation when the home sells.
How shared equity benefits homeowners:
- Increase buying power
- Retain some of your savings and buy a home
- Avoid costly private mortgage insurance and high interest rates
The average loan to value (the percentage borrowed to purchase a home) for a first-time homeowner is 92.6%. Homebuyers who borrow more than 80% of a home’s value upfront are seen as risky by lenders. Traditionally, they overcome this with unfavorable interest rates and mortgage insurance. Shared equity allows for buyers to afford a large enough downpayment to avoid these costs.
The downside? By sharing equity with a firm like Unison, a home buyer saves upfront but ends up giving up a cut of their proceeds from sale if their home has increased in value.
Regardless of whether you are the type to give up some of your equity to allow an outside investor to alleviate some of the capital-intensiveness of home buying, shared equity is catching on. Unison invested alongside 450 homebuyers last year, and they project to invest with roughly 2,500-3,000 more people in 2018.
Check out the full article to dig deeper into the mechanics of shared equity.