How Much Money Do You Really Need to Buy a New Home?

When thinking about buying a new construction home, most people account for the down payment, closing costs, and mortgage repayments to decide if they are financially ready. While these certainly are the most significant costs associated with buying a home, there are other ongoing expenses beyond your monthly mortgage payments that you need to consider. In this article, we will highlight both the upfront and ongoing costs involved in buying a new construction home to help you decide whether it is a dream you can afford.

Upfront Costs

Upfront costs are those you will be required to pay to finalize the purchase of your new construction home. These include:

Down Payment

A down payment is a percentage of the home’s total price that is paid upfront to the lender to secure the loan. In the past, all lenders required a minimum of 20 percent down payment but, in today’s housing market, where a 20 percent down payment can be a very large sum of cash, it is possible to put down as little as 3 percent. Borrowers with low credit scores or high debt-to-income ratios are required to pay more, and most people put down somewhere between 5 and 15 percent of their home’s purchase price. Government-backed mortgages, such as FHA, VA, and USDA loans, are another option for homebuyers, offering low down payment amounts and reduced qualification requirements that can make it easier for first-time homebuyers to enter the market. It’s important to understand, however, that any down payment of less than 20 percent will incur monthly private mortgage insurance (PMI) expenses.

Closing Costs

Closing costs are fees paid to your lender in addition to the price of your home. Closing costs typically range between 2 and 5 percent of the home’s purchase price. The types and amounts of fees included in closing costs vary according to your loan type and the state you live in. Specifically, closing costs may include:

• Lender fees, including an application fee and loan origination fee
• Appraisal fee
• Title fees, including fees for title search and insurance
• Survey fee
• Prorated property taxes
• Prorated homeowners’ insurance premiums
• Prorated homeowners’ association fees
• Upfront private mortgage insurance payment (for a loan with less than 20 percent down payment)
• Funding fees (applies to certain loan types)

Many lenders promote mortgages with “no closing costs.” While this may sound appealing, it’s essential to read the fine print and understand who is actually paying the closing costs. In most cases, these costs are simply being added to the total mortgage amount, meaning that you are borrowing more money and therefore paying more interest.

Lender Cash Requirements

As a way to ensure that a borrower will be able to make their mortgage payments, many lenders require a certain amount of cash reserves to be available after all other upfront expenses have been paid. The amount required depends on the lender’s policies and the borrower’s income-to-debt ratio.

Moving Costs

The cost of hiring professional movers and transporting your belongings can be significant, particularly if you’re moving long-distance. Moving expenses should therefore be budgeted for in total upfront costs.

Ongoing Expenses

Mortgage Repayments

Your mortgage repayment is likely to be your most significant ongoing expense as a homeowner. Mortgage repayments can include interest only or principal and interest payments, depending on your loan type. If you have a fixed-rate loan, your repayment amount will not change during the fixed-rate period, making it easy to budget for your monthly payments. If you have a variable-rate mortgage however, you will need to be prepared for the possibility of your repayment amount changing in line with market interest rates.

Property Taxes

Property taxes are likely to be the next most significant ongoing expense you will face as a homeowner. Property taxes are typically calculated as a percentage of a home’s estimated value and are paid annually or semi-annually. To pay your property taxes, you will have the option to make monthly payments to be held in an escrow account by your lender or to pay the entire bill yourself by its due date.

Property tax rates and laws are determined by the state and county in which you live. Tax rates vary significantly between states, with Hawaii having the lowest property tax rates in the country and New Jersey having the highest. It’s a good idea to research the state or county you are thinking about buying in to find out the property tax rate and decide if it is an affordable place to live. Also keep in mind that property taxes can change significantly from year to year in line with a home’s assessed value, which can increase or decrease due to market fluctuations. Renovations or improvements made to a home can also increase its assessed value and thereby increase its property taxes.

Homeowner’s Insurance

Homeowner’s insurance insures your house and belongings in case of a major event, such as flooding or fire. The cost of homeowner’s insurance varies depending on the location and size of your home, as well as the risk factors in your area. Homeowners’ insurance can be paid directly to the insurance company or can be escrowed and included in your monthly mortgage payments.

The insurance industry is highly competitive and rates between different companies can vary widely, so it’s wise to shop around or use a broker who can compare rates for you. You can also expect insurance rates to increase slightly from one year to the next, therefore, it’s a good idea to compare your existing rate to other insurers each year.

Private Mortgage Insurance

Private mortgage insurance, also referred to as PMI, is required if you make a down payment of less than 20 percent of your home’s value. PMI is paid monthly and can cost anywhere between 0.5 and 5 percent of your mortgage amount each year. Your PMI amount will be determined by your credit score, loan-to-value ratio, and your lender's policies. Once you have at least 20 percent equity in your home, you can apply to have your PMI canceled.

Homeowners’ Association Fees

Homeowners’ associations (HOAs) are most common in newly built communities and condominium buildings. Their purpose is to provide community maintenance services and to help to regulate the neighborhood or community with the intention of protecting home values.

If you buy in a community or neighborhood with an HOA, you will be required to pay HOA dues on a regular basis, typically monthly or quarterly. HOA fees vary according to the location of the community and the types of amenities and services offered. When budgeting for HOA fees, keep in mind that they may increase slightly from one year to the next. HOAs sometimes also require extra fees to be paid by residents to cover the cost of major repairs or one-off community renovation projects.

Maintenance Costs

As a homeowner, you will likely face more maintenance costs than you did while living in a small apartment managed by a landlord. If you’re thinking about buying a home, you’ll need to consider the following maintenance costs:

• Yard maintenance - Yard maintenance is essential to keep your property looking neat and tidy and to prevent any damage that can be caused by overgrown weeds and tree branches. If your home is part of an HOA, it’s likely that you will also be required to maintain your yard to a certain standard in line with their rules. Yard maintenance costs money whether you choose to buy a lawn mower and other equipment to do it yourself or hire someone to do it for you on a regular basis.
• Heating, ventilation, and air conditioning (HVAC) system maintenance - HVAC system tune-ups are recommended semi-annually to keep your system running efficiently at all times. AC and furnace filters also need to be purchased and replaced regularly. Since HVAC maintenance is a specialized task, most homeowners pay a professional to do the work for them.
  
• Pest control - Proactive pest control is important to prevent infestation which can cause serious damage to your home and belongings. While there are many do-it-yourself products on the market, professional pest control service is recommended, particularly in areas with a warmer climate.
  
• Home repairs - One of the key benefits of buying a new construction home is that you get a builder’s home warranty included with your purchase. This covers the cost of repairing any issues that arise with the materials or systems installed in the home for a specified period of time, usually one to two years. To make the most of your builder’s home warranty, be sure to take the time to understand exactly what it covers and for what period of time. Beyond this coverage, you as the homeowner are responsible for repairing anything that goes wrong in your house. Maintaining a home repair savings fund is the best way to ensure you have the money you need readily available in the event that an unexpected issue arises, such as a plumbing leak or a broken appliance.
  

Utility Bills and Other Expenses

Depending on where you’re moving from and your specific circumstances, you may be faced with increased monthly expenses once you move into your new home. Here are some examples to help you think through how your spending may change:

• Utility bills - If buying a new home means you’re moving from a small apartment to a larger house, you will likely see an increase in your utility bills as a result of the increased energy required to cool or heat the larger space.
• Gas spending - If moving to your new home is going to lengthen your commute to work, school, or anywhere else, you will likely end up spending more on gasoline each month.
• Security system - If you have or are planning to install a monitored security system in your new home, you will need to budget for the monthly monitoring fee you will pay to the security company.

The Bottomline

There are a number of upfront and ongoing expenses involved in becoming a homeowner, which can vary based on where you live and your specific circumstances. Understanding what these costs are and budgeting for them is the best way to decide if you’re financially ready to buy a new home.

When you’re ready to start exploring, NewHomesMate is here to assist. On our platform, you can search for and tour thousands of new construction homes and communities in your area, and we can even help you get pre-approved for a mortgage! Learn more about us and start searching for your new home with NewHomesMate today!