While these upfront costs may appear like a heavy financial burden to take on all at once, many of them can actually help you save money over the long term. With that in mind, the following are six upfront costs that will save you money in the long run:
1. The Home Inspection
A home inspection typically costs between $300 and $450 for a standard single-family home. It's critical that you pay for a home inspection before you sign on the dotted line. A home inspection allows you to uncover any issues with the home. If these issues are expensive (for example, if it's revealed that a new roof is needed), you'll want to negotiate with the seller to bring the price down. If you don't pay for an inspection, you could get stuck footing the bill for any repairs that are needed following your purchase.
2. The Down Payment
The odds are that you'll be taking out a home loan to pay for the house. Lenders will require you to pay a percentage of the home's cost upfront to secure the rest of the loan. This is known as a "down payment." The bigger the down payment you can make upfront, the less you'll owe on the house (and the more equity you'll have in the house right off the bat).
Making a larger down payment can save you money in several other ways as well. First off, if you make a down payment of at least 20 percent, you'll no longer be required to pay mortgage insurance every month. Secondly, the bigger your down payment is, the lower your interest rate will likely be.
3. Title Insurance
Title insurance helps protect you in the event that you buy the house and it turns out a third party (outside the seller) has a legal or financial claim on the property, which can end up being costly to deal with. Your lender will require you to buy a lender's title insurance policy, but you should also buy an owner's title policy to protect yourself. The cost will vary, but for a $200,000 home, the average title insurance policy will cost around $1,374.
4. The Home Appraisal
Most lenders will require you to pay for a home appraisal. But even if you are paying out of pocket, a home appraisal is a must. Essentially, an appraisal is an official evaluation of the value of the property. By getting an appraisal, you'll determine whether the seller's asking price is fair or not.
Lenders require an appraisal to ensure that they're not lending you money to significantly overpay for a house; however, you'll want an appraisal to make sure you're not overpaying as well. If you overpay for a house, you could lose money if you ever decide to sell it since it will be difficult to get back what you paid for it. Generally speaking, official home appraisals cost between $300 and $450.
5. Homeowner's Insurance
Lenders will require you to buy homeowner's insurance upfront. They want to make sure you're financially covered in case anything happens to your home so that you will be able to continue paying your mortgage even if significant repair work is required. Of course, you'll want homeowner's insurance as well so that you don't have to pay for certain types of damage that may occur to your home.
While insurance of any kind is typically paid as a monthly premium, lenders will often require you to put the first year's worth of premiums into escrow so that you won't miss any payments for at least the first 12 months. The cost of homeowner's insurance varies based on a variety of factors (including the size of the house and location). However, the average cost of homeowner's insurance in the U.S. is $1,312 per year.
One optional upfront cost is the purchase of points. You can pay for points upfront (which equal 1 percent of the home's total cost) in order to reduce your interest rate. If your loan has a higher interest rate, paying for points can help save you money on interest over the long run.
It's important that you know what to expect when it comes to the upfront costs of homeownership so that you can be financially prepared for the home buying process. These are just a few of the upfront costs that you're expected to pay when you close on a home that will help save you money over the long term.