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When you're deciding whether you're financially ready to buy a house, it's important to account for both the upfront costs of home buying and the expenses you'll need to budget for after closing. Saving up for initial costs like the down payment is pretty major, but your bank account will need to be braced for the bills you'll pay every month — plus unexpected expenses that, as a homeowner, are your responsibility.
If you're thinking about becoming a homeowner, here's a rundown of the costs of buying a house.
» MORE: How much house can you afford?
One-time costs of buying a house
The down payment always looms large for folks considering buying a home. The good news? Though a 20% down payment would enable you to skip mortgage insurance — more on that below — putting 20% down isn't required. Depending on what kind of home loan you get, your down payment could be as low as, well, nothing.
Conventional loans can allow for down payments as low as 3%.
FHA loans, which are backed by the Federal Housing Administration, can have down payments as low as 3.5%.
VA loans, which are guaranteed by the U.S. Department of Veterans Affairs, allow servicemembers and veterans to get home loans with 0% down.
USDA loans, from the U.S. Department of Agriculture, let buyers in rural areas pay as little as 0% down.
Down payments can be a bit of a compromise, balancing what you can reasonably save over a period of time with your desire to buy a home sooner rather than later. If you need a boost in the down payment department, explore local and state assistance programs.
» MORE: Ways to save for a down payment
Closing costs are lender and third-party fees paid at the close of a real estate transaction — in other words, they're part of the money you pay the day that you sign off on all the paperwork and get the keys to the house. Closing costs are generally 2% to 5% of the total price of the home. For a $300,000 home, you could expect to pay $6,000 to $15,000 in closing costs.
Closing costs can include:
If you have an FHA loan, your closing costs will include an upfront mortgage insurance payment equal to 1.75% of the total cost of the loan. VA and USDA loans do not require mortgage insurance, but they do have funding fees that are paid at closing. The VA funding fee ranges from 1.4% to 3.6%, depending on the size of your down payment and whether you've bought a home with a VA loan before. USDA loan guarantee fees also vary but are no higher than 3.5%.
When you're preapproved for any type of home loan, you will receive an official Loan Estimate that outlines all of the closing costs. This document will also make clear which costs you can shop around for and which are non-negotiable.
Relocating is a cost, too, whether it's across the country or across town. If you're doing it yourself, your out-of-pocket costs will be pretty low (though your back might not be happy!). But if you're paying professional movers or transporting your belongings a long distance, moving may deserve its own budget.
Ongoing homeowner expenses
Your mortgage payment will probably be your biggest ongoing expense as a homeowner. Mortgage payments include the principal, or the amount you borrowed to buy the home, as well as interest. Though your mortgage payment amount won't change over time (unless you have an adjustable-rate mortgage or you opt to make a change, like refinancing), the mix of how much of the payment goes toward principal versus interest will change over the life of the loan. This is called amortization.
Buying a less expensive home is obviously one way to keep your mortgage payments low, but affordable houses are scarce in many markets. Regardless of your home's price tag, you can rein in your monthly mortgage payments by comparing multiple mortgage lenders to get the best interest rate. Though those fractions of a percentage might seem like small differences, they could save you hundreds of dollars per year — and over the life of a loan, that can really add up.
» MORE: Calculate your mortgage payment
Property taxes are generally due once or twice a year, but property tax laws and policies vary by state and county. Local tax information can be readily researched online and can help you determine whether a town or neighborhood will be in your price range.
Local governments can raise property taxes to cover municipal projects or expenses, so don’t assume your property taxes will hold steady. Increases in the home’s assessed value, whether due to renovations or overall market conditions, can also cause property taxes to rise.
Many homeowners opt to have their mortgage servicers pay property taxes on their behalf, keeping the money in an escrow account. That means if your property taxes increase, your monthly mortgage payment will go up in order to cover the tax bill.
» MORE: Can you deduct property taxes?
Homeowners and hazard insurance
Like taxes, these two types of insurance vary by state and region and can also be paid by your lender from an escrow account. According to NerdWallet's analysis, the average cost of homeowners insurance is $1,784 a year. The cost of hazard insurance, which is generally part of homeowners insurance policies, is determined by the risk factors in your area, such as floods and earthquakes.
You can usually keep your costs lower if you bundle homeowners with your auto or life insurance policies.
If you make a down payment of less than 20% on a conventional loan, you’ll have to pay mortgage insurance, which can be up to 2% of the loan amount annually. These premiums protect the mortgage lender in the event you default on the loan. These payments are generally included in your monthly mortgage payment. Once you have at least 20% home equity, mortgage insurance can be canceled.
With an FHA loan, the rules are a bit different. In addition to that one-time fee of 1.75% at closing, you'll make monthly mortgage insurance payments equal to 0.45% to 1.05% of the total loan amount. If you made a down payment that's less than 10%, FHA mortgage insurance lasts for the life of the loan — the only way out is to refinance to a conventional loan or sell the home. If you put down 10% or more on an FHA loan, you'll pay FHA mortgage insurance for 11 years.
VA and USDA loans don't require mortgage insurance, but you will pay a one-time funding fee, as described above.
HOA, co-op or condo fees
If you’re buying a house in a planned development and a homeowners association, or you’re buying a condo or co-op, you’ll probably have a monthly HOA fee on top of your mortgage payment. That fee pays for improvements to the entire complex or shared amenities, such as landscaping or painting, or building-wide utilities such as electricity.
In pricey urban areas, HOA fees can rival mortgage payments, so pay close attention to those costs before buying. You should also consider whether the complex is due for a major upgrade, which could lead to a special assessment — an additional bill to cover each homeowner's share of the joint improvement.
» MORE: Buying a condo vs. a house
Utilities, maintenance and emergencies
Last but not least, don't forget those bills! Some, like Wi-Fi, won't be any different from renting, but others might take a bigger bite out of your budget. (Unsurprisingly, heating and cooling an entire house can cost considerably more than keeping a one-bedroom apartment comfortable.) You may also want to pay someone else to take care of maintenance that might have previously fallen on your landlord, like snow removal or yard care.
In addition to these, you may want to create an emergency fund that's specifically for home-related expenses — think the fridge unexpectedly dying or a plumbing debacle. Having some money set aside for unexpected household expenditures will help keep you from tapping into your last-resort emergency savings or taking on credit card debt. Consider stowing at least 1% of the home's market value in savings each year as your long-term household maintenance and repair fund.