How Much Does it Cost to Buy a House Unlike goods such as clothing or groceries, the price tag of your new house isnt all that youll end up paying in the process of becoming a Property owner. The listing price of a home typically does not include several extra expenses that youll incur as you go through the sales process. For most buyers, the costs are wrapped up in your mortgage loan, and it can be confusing as to exactly what youre paying. In fact, many home buyers dont even realize that some of these expenses are part of the real estate buying experience until its time to sign the closing paperwork. To best understand the sales process from start to finish, and to know exactly what youre paying for, heres an overview of some of the costs associated with purchasing a residential property. Earnest Monies Earnest money is one of the first things youll pay after the seller accepts your offer. This is similar to a deposit; its a way of showing that youre serious about the deal and that youll hold up your end of the bargain. Only under certain circumstances -- usually when the seller backs out for some reason -- can earnest money be refunded to the buyer, so once you pay, youre indicating that youll go through with the sale or lose the money youve paid upfront. Theres no set amount to pay for earnest money. In the Dallas area, it is often about 1 percent of the purchase price, but it can range up to 5 percent. Youll negotiate the amount with the seller, usually through your real estate agents. The earnest money doesnt go immediately to the seller. Instead, its held in whats called escrow until the entire sale goes through. The escrow process protects both buyer and seller by having a neutral, licensed third party collect and hold any monies related to the real estate transaction until it has closed. That escrow officer ensures that both parties do what theyve agreed to before releasing any money from the escrow account. As a bonus, this usually means that you dont have to be present with the seller to finalize the sale, but instead can rely on the state-licensed escrow officer to look out for your interests and make sure business is concluded fairly. Sometimes, instead of earnest money, you may want to set up an option period. That gives you a set number of days to back out of the agreement as the buyer, usually because youre unable to sell your own home or a maintenance issue looks too overwhelming to go through with the sale. Youll pay an option fee once you finalize the initial contract with the seller, and the amount can vary depending on the length and what you agree to with the seller. Option fees are less common in the Dallas-Fort Worth residential real estate market right now because theres a lot of competition for homes, and sellers are often able to make a deal with a buyer who does not request or require an option period. Mortgage Fees - Points on Mortgages You may choose to pay for discount points, which are used to buy a lower interest rate on your mortgage. Each point costs 1 percent of the total amount youre borrowing; on a $200,000 loan, you would pay $2,000 for a discount point. In essence, youre paying some of the interest to the lender upfront to give you a better deal on long-term interest. Its only valuable if youre planning to stay in your newly purchased home for several years. A Bank of America analysis shows that youd have tonbsp;stay in your home 68 monthsnbsp;to break even, and youd save about $10,000 per point over a 30-year loan period. For many buyers, especially first-time home buyers, applying the money toward your down payment can make better financial sense. For example, if youre close to a 20 percent down payment, youll want to put everything you can toward that so you wont be required to carry private mortgage Insurance. On the other hand, some Texas buyers will see tax benefits from buying points. Its important to check the numbers under a variety of scenarios to see whether discount points are a good deal for you. If you choose to purchase points on your mortgage, youll pay for them at the time of closing. Tax When Buying a House - Prorated Taxes Every municipality and county where you purchase real estate will collect property taxes. These taxes typically fund schools, roads, emergency services, parks and other public expenditures. Texas real estate ownersnbsp;pay higher property taxesnbsp;than many other states because there is no state income tax; all the money to run city and county government comes from property taxes. The seller is responsible for paying those taxes from January 1 through the selling date; you as the buyer will pay them for the remainder of the year. If the seller has already paid the tax bill through the end of the year, that money will be returned, and youll be responsible for paying the prorated amount from the selling date until December 31. The good news is that you can claim a tax deduction for all of the prorated taxes you owe, even if the seller doesnt require you to reimburse the entire amount. Save a copy of your closing statement as proof of your payment. Also, make sure to check with a knowledgeable tax attorney to best understand the deductions you can take. Closing Costs Most buyers expect closing costs, but dont know how much the total will be or what those costs cover. Closing costs encompass all the third-party costs of completing a real estate deal, including lender fees. As a buyer, youll be responsible for the majority of closing costs associated with buying a residence, but the seller will also typically pay for a few expenses, such as some types of home inspections, sales commissions to the real estate agents and title insurance. In most cases, closing costs will totalnbsp;between 2 and 5 percentnbsp;of the cost of your mortgage loan. Using Smart Assetsnbsp;closing costs calculatornbsp;for the Dallas area, you can estimate that youll pay a little over $7,200 to close a $200,000 loan. Thats 3.6 percent of the loan value. So whats included in the closing costs -- and for what are you paying? Heres a list of some of the individual fees that are covered under the umbrella of closing costs. Loan Origination Fee and Underwriting Fees.nbsp;These are all the costs of researching and processing the loan and preparing documentation. In most cases, this will be a percentage of the total loan -- around 1 percent. Its typically the most significant cost in the closing process. Depending on your financial situation and the lenders policies, you may be able to have these covered by the lender -- but youll typically pay a higher interest rate in exchange. Title Insurance This is one of the costs that both buyers and sellers must incur in Texas, and its often one of the most significant expenses. Buyers purchase title insurance for the lender to guarantee that there will be no issues with the title in the future that diminish the value of the property. Sellers procure it for the buyer to make sure the title is clear. For example, the title insurance can cover expenses associated with an improperly recorded lien that could be costly if discovered at a later date. In Texas, additional title fees are wrapped up in the title insurance costs instead of being listed -- and paid for -- separately. These can include the cost of doing a title search, recording and notarizing documents and delivery or courier expenses. Appraisal Fee.nbsp;Any institution that you borrow money from wants to be sure that the property is valued at least as much as the loan youll be taking out. To do this, the lender employs a third-party, independent property appraiser who will evaluate the home and compare it to other residential real estate in the area to establish a current value. The cost of the appraisers time and report is the appraisal fee. Depending on the results of the appraisal, the lender may require additional inspections, such as for pests, or work done to bring the property up to code. These incur additional fees, which may be paid by the buyer or negotiated with the seller, depending on the extent of the requirements. This is in addition to any inspections that may be requested and paid by the buyer. Survey Fee.nbsp;You might not have to pay for a survey of the property in all cases, but its a good idea to do so. Your lender hires a surveyor to confirm the property lines, so you know exactly what youre buying and you confirm the dimensions of the property. Surveys help ensure that there are no surprises down the road about the size of your property or exactly where the lines are set. Recording Fee.nbsp;Each Texas county will have a separate, small fee for making changes to their property records. These are typically only a few dollars but need to be added to the total. Settlement Fee.nbsp;If youve purchased a home outside of Texas, you may expect a settlement or closing fee. However, in Texas, a lawyer is not required to settle the transaction; your title company handles any legal aspects of the deal. Now that you understand what youll be paying for, you may be curious about how to reduce closing costs. It is possible to have the seller pay for more of the closing costs, although thats less common in the Dallas areas hot sellers market. Instead, you can have the seller increase the purchase price to include closing fees, which makes it easier to finance those costs. You can also negotiate with your lender to cover more of the costs in exchange for a higher interest rate or to wrap the closing costs into your mortgage loan. Insurance Costs If you have a mortgage, youre likely going to have to purchase some types of insurance to help protect the property value for the lender. In addition to title insurance, which covers any errors made that impact legal ownership of the property and is usually incorporated with your closing costs, youll also have to insure the property and possibly carry insurance on the mortgage itself. Homeowners Insurance Premium.nbsp;Most lenders require proof that you have homeowners insurance to cover any damage. Youll need to work with an independent insurance agency that offers homeowners insurance to write a policy and pay the first installment, or premium. Depending on where your property is located, you may also be able to purchase separate flood insurance. Your lender may require this additional insurance policy as part of the mortgage agreement. Mortgage Insurance Fee.nbsp;If your down payment is less than 20 percent, most lenders will require you to purchase private mortgage insurance (PMI). This will ensure the lender recovers enough of the value to protect their investment in case you default. Youll incur an application fee and will usually need to pay for the first year of insurance upfront. In Texas, the cost of mortgage insurance starts atnbsp;around 0.5 percent, depending on the size of the down payment as well as the type and terms of the loan. This may be rolled into your closing costs, depending on how your lender sets everything up. You dont have to pay mortgage insurance forever. Once youve paid enough into the property to cover at least 20 percent of its value, you can cancel your PMI policy. Be sure to get and save the information on how to do so. Do you have questions about the closing costs you may pay? Were happy to help you better understand all the costs of homeownership, including getting a mortgage and navigating closing.nbsp;Contact usnbsp;to learn more about buying a home in the Dallas area and how we can help you through the entire process.