When it comes to purchasing your first home you will likely experience many feelings from stress to excitement. Before my current role of helping families live their best lives through finance, I worked in title insurance for three years. During those three years, I learned a lot about the process of purchasing a home including my own experience of purchasing my first house with my wife.
What we learned was that we had no idea how to budget for a house purchase. We had no idea how property taxes and insurance would influence our monthly mortgage. I have come up with four areas to explain why you need to budget for them when purchasing a house.
There are two ways that your property taxes could be handled. The first is through what is called an escrow account with your lender and the second is paying the county yourself. An escrow account is essentially a rolling account that will pay your taxes and insurance on your behalf. When you purchase your house you will have additional funds to bring in to fill up your escrow account to have at least the first payment of taxes and a couple months of insurance premiums. Without an escrow account, you are paying the taxes directly and for a $200,000 house will run at least a couple thousand dollars and varies on your county rates.
Like taxes, your insurance premiums can be paid through your escrow account or directly by you. Insurance is going to be around $100 a month and the premium will be influenced by the type of house, size, age and condition of the house. Factors like smoke alarms, distance to a fire station/fire hydrant, security system and whether you have a pet or not can all influence your premium depending on the company. Remember not all insurance is the same.
Real Estate Agent Commission:
Depending on where you live and the customs that are established in your area. The buyer or the seller will pay the commission. When my wife and I sold our house in Rapid City we had to pay both real estate agents their commission and in Omaha when we purchased we paid our agent’s commission. The commission is usually 3% of the sales price per agent.
Title Insurance Costs:
Title insurance is important. I worked in the industry for three years full time and my family has been in the industry for over ten. It is the cheapest insurance you will ever purchase as a one-time premium and insures you for as long as you own the property. The price of insurance will correlate with the price of your home and many title companies now have calculators on their websites to help you estimate the cost and/or you can call them for estimation.
These are not the same as title insurance costs. Closing costs are associated with the bank in preparing all of your documents for signing and the work they did to get you approved for your mortgage. The closing company will also have a fee for taking you through the documents and making sure you understand what you are signing. These costs will vary depending on your region but combined they will at least by a thousand dollars.
Having knowledge of these costs now will help you better budget for the purchase of a house. I go into further detail on how to budget for these on another article I wrote on LinkedIn. If you are not aware of your house purchasing costs you may end over budget and struggle to pay the down payment and then the monthly payment afterward. But that won’t be you because now you know how to budget for these items unlike my wife and I did when we bought our first house. And if you want help building knowledge around the costs of purchasing a house please let me know, the last thing I want is someone in over their head like my wife and I were with our first house.
Steven LaFleur grew up in Rapid City, SD and after high school went to college at the University of Nebraska-Lincoln where he majored in finance and met his wife Kelly. After college graduation in 2013 working for the family business for three years Steven decided it was time to pursue a passion of his in helping people and their finances. Steven is now a financial advisor at True Measure Wealth Management in Omaha, NE. Steven and his wife Kelly have two daughters who keep them busy at all times of the day. Steven enjoys skiing in the mountains and also biking and golfing during the non-snowy months.