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The High Cost(s) of Buying a Home

If you’ve never bought a home before, you may see a $300,000 asking price and think,“I can afford that” (with a mortgage, most likely).

But, can you really? Are you aware of the fees and expenses involved in purchasing a home?

Homeownership is a worthwhile investment. Each home is one of a kind and sits on something of extreme value—land. Despite the value and benefits of homeownership, it is important to be aware of all of the costs you’ll incur when purchasing a home.

Earnest Money

The first expense you’ll incur when buying a home is earnest money. Earnest money is a deposit which you, as a home buyer, give to your Realtor or broker. It is then kept in escrow until the purchase is finalized, when it is put towards the down payment or closing costs.

If things fall through and you do not end up getting the house by no fault of yours, the earnest money will be returned to you. According to the Department of Housing and Urban Development, typical earnest money deposits range from $500 to $2,000. This is an up-front, out of pocket cost that you will have to come up with to prove to the seller that you are serious about buying the home.

Down Payment

The next major cost that comes with buying a home is the down payment. The down payment is a percentage of the cost of the home; which you pay at closing. VA loans for qualified veterans do not require any down payment, yet the vast majority of loans do.

FHA loans, which are most popular for first time homebuyers, require 3.5% down payment, as of June 2010. Conventional loans require 20% down payment, which can be a huge expense for any family. For example, if the house you want to buy is $300,000 and you do not qualify for a VA or FHA loan, you will have to bring $60,000 to the table at closing. You can use existing savings, a gift from family, the principal of a Roth IRA, or even up to $10,000 from a traditional IRA towards your down payment. But a down payment is just that: a down payment. Thus, it cannot be rolled into the monthly mortgage payment.

Broker Fees

You will also have to pay real estate brokerage fees if you’ve used a broker or real estate agent. The typical broker’s fee is 3% of the sales price, though the custom varies from state to state. The brokerage fee is the commission that the firm, the broker and the real estate agents must split for the services rendered in showing you houses, drafting paperwork, submitting offers and coordinating the transaction.

Closing Costs

Closing costs are the next major expense to plan for. They are used to pay for things like points, inspection fees, appraisal fees, title company fees, documentary transfer taxes, recording fees and many more important items. The Department of Housing and Urban Development states that closing costs typically run anywhere from 3 to 4% of the home’s price.

Luckily, you will know generally what to expect as far as closing costs ahead of time, as lenders are required to give you a good faith estimate, or an estimate of closing costs, within three days of filling out a loan application. And. it is possible to get some of these closing costs rolled into the loan for payments at a later date.

Points, for example, are an up-front expense, a pre-paid interest used to bring down the interest of the loan. One point is equal to 1% of the loan value. You may have to pay several points up-front. If you are trying to reduce your up-front costs, talk to your mortgage lender about what you can have rolled into the loan as far as closing costs. Every expense that you have to pay is listed on the HUD settlement statement, so be sure to review this important document and ask your real estate agent or lender if you have any questions.


Finally, don’t forget that the expenses don’t end when you get the keys in your hand. One of the major downsides to home ownership is that you’re now responsible for anything that could (and eventually will) go wrong. Even if your home inspection came up clean, a major appliance could break and stick you with a multi-thousand dollar repair bill.

The lesson? Even if you’ve saved cash for a huge down payment and all the other expenses associated with buying a home, the last place you want to be is in your new house with zero cash in the bank. Always plan to save a little extra so you have a new home expense fund after you move!

What about you? Did any of the expenses or closing costs associated with buying a home take you by surprise?

Looking for a realtor? Find 5-star real estate agents in your area now with Zillow.

Published or updated on July 6, 2010

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. Big Sigh says:

    I agree that 20% downpayment and 10% of the value of the house would be ideal, but it will take my husband and I another 5+ years to save up the $80,000 we’d need for 20% down on a 425,000 (which is about the cheapest not-falling-down house you can get in DC), and then another 2 years to save 10% for unexpected repair costs… and in the mean time, it’s been 8 years and we’ve not earned any equity. Further, in 8 years nothing in DC will be available for $425K… By then it will be more like $600K because the city is gentrifying pretty rapidly. I feel like going ahead with an FHA loan next year, when we have $15K makes more sense… Am I crazy?

    • Sarah Davis says:

      Crazy? Absoluetly not. What’s best for you depends on your personal situation and the market that you live in, both of which you know best. FHA loans are not evil just because they involve PMI; they are truly sometimes the best option.

  2. I have the 30/30/3 rule.

    20% downpayment for sure, and have at least 10% of the value of the house in CASH. That’s one of the 30 rules.

  3. Brian O says:

    I bought my first place about a year ago and managed to get my most of my furniture cheap/used but the repairs definitely was not expected. Within the first 9 months I had my air conditioner, dish washer, garbage disposal, and hot water tank break. It was definitely unlucky but it happens and it’s a perfect example of the importance of having a decent sized repair fun set aside from the very beginning.

  4. It’s true! When we bought this house and things went wrong, it always seemed to cost $1,000 or multiples, which we in turn called units. How much to fix the chimney? Three units! How much to fix the front porch? Five units!

  5. Sarah Davis says:

    Thanks everyone. Thanks Ace for finding that estimate. I definitely second the recommendation to have a savings account for home repairs and maintenance. It’s not that these items all make buying a home not worth it. In my opinion buying homes is still one of the best ways to create wealth. Yet it is unwise to buy a home without knowing what costs to expect. Thanks all for your contributions!!

  6. Ace says:

    @Mike – I’ve seen anywhere between 1%-3% recommended for home maintenance. A lot of it depends on the condition of your house, how old it is, how well the previous owners took care of it etc. It’s definitely advisable to have a savings account dedicated to maintenance because sooner or later you will be hit with some pretty major and expensive repairs, and having an account set aside for just such an occasion will greatly reduce your stress.

    Sarah this was great information, and I think that it’s easy for people to forget about all of these extra costs for home ownership!

  7. Used Macbook says:

    This is very true. Many people overlook all the other expenses (outside of the mortgage) that comes with owning a home.

  8. John Hunter says:

    Well said and most people need to expect to spend quite a bit of money on new furniture… That is obviously a cost you can avoid if you just don’t buy it. But for many moving into a new house and having it half empty or full of cheap stuff just won’t feel right.

    Also in addition to fixing broken things you have potential costs – chimney cleaning, gutter cleaning, yard work…

    Many closing costs are ludicrously high or completely fake (charing you for FedEx fees even if they won’t be used…) :-(

  9. Sarah Davis says:

    Good question Mike. I can’t give you a good estimate but I can lead you to one from Kiplinger.


    That is a very interesting estimate though she doesn’t take into account lawn and garden expenses like you said.

    Everything is so variable. If you live in a condo, you will not pay anything for lawn or garden expenses (under that name anyway) since HOAs cover that. If you have a huge lawn you are going to pay a lot. My husband and I recently re-landscaped our front and back with only drought-tolerant plants, pebbles, stepping stones, bricks and ground cover. The annual cost of that will be very minimal.

    Also as far as home maintenance, older homes are obviously going to require more than newer homes. It’s so hard to come up with an estimate because of all the variables. But I hope the link helps too! Have a great day!

  10. Sarah, any estimate ehat the annual expense is of owning a home; maintenance, insurance, lawn and garden expenses?

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