Shining a light on the hidden costs of buying a home

So, you just started shopping for a home (huzzah!), and you’re scrolling through online listings. You set your search filter so you only see homes with a price tag you can afford... but you know there are hidden fees in the homebuying process that you’ll need to include in your budget. While it’s a great place to start, the purchase price you see on most real estate websites is not the most accurate way to gauge affordability.

Think of it like an iceberg. Only a portion of homebuying cost is expressed by the listing price—the tip of the iceberg—while other fees are hidden beneath the surface. What’s more, some of these hidden costs are recurring fees—such as interest and insurance—that can continually impact a mortgage for years to come. If you think of buying a home as a one-time purchase (the down payment and closing costs) you’re not alone, but the monthly cost of a mortgage deserves careful consideration as well. Monthly costs can vary a lot between properties and play a big part in determining which homes you can actually afford.

Fees associated with buying a house

No matter which type of mortgage you choose, you’re guaranteed to encounter at least some of the following expenses in the process of closing on a home. Most will be categorized in your Loan Estimate—which is a standard document your lender is required to send you within 3 business days of your application. However, there are some outliers that you’ll need to factor into your budget as well. It’s important to understand what these costs cover, why some of them are frequently hidden by lenders, and whether they have a one-time or recurring impact on your mortgage.

Origination fees

One of the most common fees in the mortgage process is the origination fee. It is used to cover such things as the processing and underwriting of your loan.

Principal

A loan’s principal is a fancy way of describing the amount of money borrowed. When it comes to a mortgage, principal is calculated by subtracting the down payment from the home’s selling price. For example, if you buy a $300k home with a $40k down payment, the principal of your loan is $260k. Each monthly mortgage payment chips away at your principal balance.

While principal is not a hidden cost in the mortgage process, it’s important to consider that it is just one component of your monthly mortgage payment. When you’re budgeting to buy a home or refinance your existing home, you must also factor in the cost of interest, along with ancillary costs, such as homeowners insurance and property taxes.

Interest

Interest is the amount that a lender charges you to borrow money, expressed as a percentage of the principal. It’s one of the basic components of your monthly mortgage payment. There’s a lot that goes into determining interest rates, and the specific rate you’re offered by a lender is weighted by your unique financial profile, including your credit score and debt-to-income ratio. For that reason, the interest rate you get from one lender may be different from the next—which is why it’s always worth comparing lenders. Even a small percentage difference can have a big impact on the short- and long-term cost of your mortgage.

Annual percentage rate (APR)

It’s easy to confuse interest and APR. Both are expressed as a percentage, but APR is a much better mortgage comparison tool. That’s because APR combines interest and some of the closing costs associated with your mortgage. While there may only be a small percentage difference between a loan’s interest rate and APR, it’s important to consider how that difference will add up over time. Even 0.25% can have a big impact on the total cost of your home.

APR is not a “hidden” number in the mortgage process. In fact, the Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. However, many borrowers don’t think critically about APR and the impact that it has on the overall cost of their home. Bottom line: interest rate is important, but APR is going to give you the clearest indication of your mortgage costs.

Cash to close

When you get a Loan Estimate, you’ll see that there is a section dedicated to “costs at closing,” including two dollar amounts: “estimated closing costs” and “estimated cash to close.” Of the two, “cash to close” is arguably the more useful figure to help you determine affordability. That’s because it includes your estimated closing costs as well as your down payment, appraisal fee, attorney’s fee (if you have one), homeowners insurance, and escrow. “Cash to close” is literally the amount of money you are expected to bring with you on closing day.

Down payment

A down payment is the upfront sum of money you put toward buying a home, expressed as a percentage of the total purchase cost. 20% is often touted as the “standard” down payment amount, but in 2019, the National Association of Realtors found that the median down payment was only 6%. In fact, in 2014, Fannie Mae and Freddie Mac introduced the Conventional 97 Loan Program, which allows first-time homebuyers to get a mortgage with as little as 3% down. The Federal Housing Administration (FHA) also offers mortgages with down payments as low as 3.5%. Alternatively, you may be eligible for a VA loan or USDA loan, which also have low minimum down payment requirements. (In short… you have options!)

A down payment is not a recurring cost, but it does influence your monthly mortgage costs. Paying less upfront might be more financially palatable in the short term, but it will leave you with more principal and interest to pay over the life of your loan.

Points/credits

Just because a lender offers you a certain interest rate, doesn’t mean you have to take it. Points and credits let you make tradeoffs on the interest rate and closing costs of your mortgage. Depending on your situation, they can each be a great tool to help you tailor your mortgage to your financial needs.

Points, also known as discount points, are a way to lower your interest rate in exchange for an upfront fee at closing. In other words, you can pay for points to get a lower interest rate. One mortgage point is equal to 1% of the mortgage amount and can lower your interest rate by up to 0.25%.

Credits work in the other direction; they can be used to lower your closing costs (or eliminate them altogether) in exchange for a higher interest rate. In either case, both credits and points can have a major impact on the costs or savings of your mortgage. It usually comes down to how long you plan to stay in the home you’re purchasing or refinancing. If you’re in it for the long haul, then paying for points might make sense; you’ll have higher closing costs but lower monthly payments. Conversely, if you’re looking at your mortgage as a relatively short-term thing (say, 5 years), then credits can be a great way to save on your closing costs—so long as you can budget for increased monthly payments.

Property taxes

All homeowners in the United States have to pay annual taxes based on the assessed value of their property. This money goes toward local community initiatives, such as maintaining roads and schools and paying for waste collection. Property taxes are collected at the state/local level, which means the amount you owe will vary based on where you live. For this reason, it’s a good idea to get an estimate of the property tax you’re likely to owe before you make an offer.

Property taxes get rolled into your monthly mortgage payment, so they’re easy to miss. It’s also worth remembering that you have to pay property taxes every year—even once your mortgage is paid off. What’s more: property taxes can fluctuate if the assessed value of your home increases or decreases.

Homeowners insurance

Pretty much all lenders are going to require you to have a homeowners insurance policy before you close on your home. That’s because they want to protect their investment as much as you do. In the unfortunate event that something happens to your home—say, a fire or storm damage—your lender wants to ensure you have the financial footing to repay your loan.

Homeowners insurance is not a hidden cost of buying a home, but it can definitely be something that many homebuyers and refinancers overlook when coming up with a budget. What’s more, you typically have to pay the first 6–12 months of premiums at or before closing—and those premiums can, and often will, go up each year.

The good news is that although your lender requires you to have homeowners insurance coverage, you’re free to shop around and find the policy that best fits your needs—and budget. To make it easier, our insurance affiliate Better Cover can connect you with homeowners insurance policies from top providers, all within your loan application.

The exact cost of your premium is determined by a number of variables, from the kind of property you’re buying (is it a stand-alone house or a condo? Is it a new construction or an old fixer-upper?) to where it’s located (is the area prone to flooding?).

Homeowners association (HOA) fees

Some buildings and communities require that residents pay HOA fees toward upkeep and maintenance. If your home is subject to HOA fees, the amount may be reflected in your closing costs but isn’t always accounted for in your monthly mortgage payment. Make sure you understand how much you’ll owe in HOA fees so you can set aside money for this recurring expense.

HOA fees don’t typically fluctuate too drastically, but they can increase over time at the discretion of your homeowners association. Refusing to pay HOA fees is out of the question; this can result in some pretty dire consequences, including a lien on your home. If you don’t want to take this expense on, look for a home that’s not subject to HOA regulations.

Third-party fees

All mortgages come with a number of third-party fees for services that don’t involve your lender. These costs are itemized in your Loan Estimate in two categories: “Services you can shop for” and “Services you cannot shop for.” As the name suggests, the former category provides the room to look for competitive rates, so it could be a chance to save some cash. The fees in the latter category are determined by the lender and cannot be negotiated. However, it’s important to have an understanding of both, so you can accurately figure out your budget.

The third party fees on your Loan Estimate may include:

• Appraisal fee: A home appraisal must be done by a licensed appraiser to determine the value of the property. You will get a copy of the report.
• Credit report: We need to check your credit in order to determine your creditworthiness and monthly debt obligations.
• Flood certification: We need to determine if your property is in a flood zone to ensure appropriate insurance coverage is in place.
• Lender’s title insurance: This fee ensures we’re protected if someone later makes a claim against the title of the property.
• Other title fees: You will see several miscellaneous title fees. These are charged by the title company for things such as document processing and paying the notary.
• Real estate transfer taxes: Local and state governments charge a transfer tax when real-estate is sold.
• Recording fees: A fee charged by your city or county to officially record the sale.
• Settlement: This fee is paid to the settlement or escrow agent for coordinating the handling and disbursement of funds between the buyer and seller.
• Owner’s title insurance: This is an optional fee. It ensures you are protected if someone later makes a claim against the title of the property.

With Better Mortgage, you can search for homes based on what they will actually cost you

There are many factors to consider when budgeting for a home, and the asking price is just the beginning. Your actual monthly costs can vary a lot between properties—insurance, property taxes, and HOA fees are just some of the additional fees that can play a role in determining which homes you can afford.

Understanding how to evaluate all this information can help you more accurately shop for homes within your price range. And the next step is to get pre-approved. Our simple online pre-approval process takes as little as 3 minutes to complete and doesn’t require a hard credit check. It’s the fastest way to figure out how much you can realistically afford. From there, you can see the impact of different levers—such as points and credits—on the overall cost of your home.