The Total Cost of Your Home
When you plan your finances for a home purchase, you may be focused on the big numbers: the principal and interest rate of your loan. If you're an educated buyer, you might expand this financial awareness to PITI: principal, interest, taxes, and insurance.
But there's an entire slew of expenses that goes beyond PITI, and you should plan for them when deciding how much home you can afford.
What goes into the total cost of buying and owning your home?
These four costs, often abbreviated as PITI, are the meat and potatoes of your home purchase budget:
- Principal: The amount of money you borrow to buy your home.
- Interest: The extra money you pay back to your lender for the privilege of borrowing the principal.
- Taxes: You'll pay property taxes on your new home. These may actually be budgeted into your mortgage payment by your lender, who collects the money through the year and makes the annual payment for you.
- Insurance: You can't buy a home without homeowner's insurance. This may be lumped in with your monthly mortgage payment, with your lender making insurance payments on your behalf.
Closing costs are a major home-buying expense -- between 3% and 5% of the purchase price of your home on top of your down payment. All those people working to get your mortgage, title, inspection, appraisals, and other tasks completed for your home purchase need to get paid. You probably won't pay every fee listed below, and some lenders lump certain fees together, or have their own labels for certain fees. But here's a list of some of the more common fees you'll see, and what they mean:
A point is equal to one percent of the total amount of your loan (not the purchase price of the home). For a $200,000 mortgage, one point is $2,000. For a $350,000 mortgage, a point is $3,500. There are two types of points that you may encounter when buying a home:
- Origination Fee (Points): An origination fee, sometimes called origination points, is the fee that you pay to your lender for doing all the work involved with getting you a loan. But be careful: this fee does not always include everything. You have the right to ask what this fee covers, and what additional fees you are being charged.
- Discount points: When you buy discount points, you are pre-paying interest up front to lower your long-term interest rate. For each point that you buy, your interest rate on a 30-year loan should decrease by 0.125 - 0.375 percent, depending on your lender, loan, and market conditions. Discount points can be worth it if you're planning to stay in your home longer than seven years. If you plan to sell your home sooner than that, you probably shouldn't bother.
Tip!
If you're considering buying discount points up front, you should make sure it's a worthwhile investment. Lending Tree has a useful calculator that lets you input the terms of your loan, and then calculate how many years you'd need to stay in your home in order for discount points to pay off.
Some lenders charge a lump-sum fee to cover all their costs, while others may have a list of smaller fees. In addition to lender fees, you'll need to cover fees charged by the county, title companies, and escrow firms or attorneys. Some of these fees may vary in terms of cost or even what they're called. Here's a sampling of some typical closing fees, what they cover, and how much they may cost you.
| Fee name | Description | Who gets the money? | How much? |
| Application fee | Lenders and brokers may charge a fee when you first apply for your loan. This fee may be waived in an effort to attract business, or it may be applied toward closing costs. If your loan application is rejected, or you decide to switch lenders, the original lender may keep your application fee. | Lender | $300 or more (However, many lenders do not charge an application fee.) |
| Appraisal fee | This covers the cost of an appraisal -- an assessment of the home's value that assures the lender that the home is worth as much as you're borrowing and spending to purchase it. | Lender or appraisal company | $350 - $500 |
| Credit report fee | This covers the cost of getting your credit scores. The average consumer can get these reports for $45 -- your lender should be paying around the same, if not less. | Lender | $45 or less. |
| Processing fee | This covers the costs of filing and dealing with the paperwork involved in getting your loan ready for the underwriter -- the person who actually verifies your information and approves your loan. | Lender | $500-$1000 |
| Underwriting fee | This covers the cost of having your loan verified and approved by a specific lender employee, known as an underwriter. | Lender | $200-$800 |
| Escrow fees | This covers the service of an escrow company or attorney -- they act as a neutral party to transfer money and paperwork. | Escrow firm or attorney | Varies with home price and location |
| Title insurance | This is paid once, at the time of closing. Though it may seem like the buyer would pay for his own insurance, the seller actually pays for the buyer's policy. The buyer, in turn, pays for a policy to protect the lender, who has a legal claim on the property (also called a lien) until the mortgage is paid off. | Paid toward lender's policy | $200-$900 |
| Transfer of taxes | This covers the cost of transferring responsibility for property taxes from the seller to the buyer. | Lender, or county or municipality | Varies by location. |
| Title company fee | The title company charges a fee to verify that the property is free of ownership or usage disputes. | Title company | $150-$400 |
| Survey fee | This may be lumped in with the title company fee, or listed separately: it covers the cost of a survey to verify the boundaries of the property being purchased. | Title company | $100-$400 |
| Attorney fees | In some states, an attorney is required to complete a home purchase. | Attorney | Varies by state, usually $350 or more. |
| Home inspection | Before you close the deal on your home, you should have it inspected by a professional. This will protect you from buying a home with serious problems that require expensive repairs. | Inspector | $350-500 |
| Pest (termite) inspection | Some states, such as California, require a pest inspection. A pest inspector will check the property for termites and other insects that can cause structural damage to a home. | Inspector | $50-$125 (may be included in home inspection cost) |
| Flood determination (life of loan) | This fee is paid to determine whether or not your home lies in a flood zone. A "life of loan" fee pays for the flood determination company to monitor your home's flood zone status over the lifetime of your mortgage. | Lender or insurance issuer | $15-30 |
| Recording fees | This covers the cost of having your home purchase recorded in the local public record by the county government. | County or municipality | $50-$200 |
| Courier fees | This covers the cost of hiring couriers to shuttle your documents to and from the lender, escrow firm, title company, and county during the closing process. You may be charged for this even if you don't use this service, so be sure to look for it. | Lender or courier company | $50 - $150 |