A First-Time Buyer’s Guide to Navigating the Financial Frontier

Congratulations, future homeowners of Colorado! As you embark on the thrilling journey of buying your first home, it’s essential to prepare yourself for the financial aspects of the process. One critical aspect is understanding closing costs—the fees and expenses you’ll encounter as you approach the finish line. Fear not! Today, we’ll break down these costs, sprinkle in a touch of wit, and shed light on what to expect. Let’s dive in!

The Down Payment Dance: Before we delve into closing costs, let’s address the elephant in the room—the down payment. This is the initial investment you make towards your new home. While it’s not a closing cost per se, it’s crucial to mention since it’s typically the most substantial out-of-pocket expense. Let’s look a house that costs $500,000. 20% of that is $100,000, but you can’t just say, “hey I’ve saved up this amount, please take this and give some keys to this house that $500,000.” I wish it were that simple, but there’s more to it.

Bonus info: Why do you want to have 20% down anyway? It’s so that you don’t have to pay private mortgage insurance, which can be hundreds of extra dollars a month on top of the mortgage itself. Also, If you’re VA you don’t have to pay that PMI regardless of what you put down. We’ll talk more about PMI in another blog post, so don’t worry about that too much for now. For this post, most of these figures will be based on a house that’s $500k with 20% down at 6.75%.

Appraisal and Inspection Fees: As diligent buyers, you’ll want to ensure the home’s value matches the price tag and that it’s in tip-top shape. The appraisal fee, usually around $400 to $700ish, covers the cost of a professional appraiser’s assessment. Additionally, the inspection fee, ranging from $500 to $1000, pays for a thorough examination of the property to uncover any potential issues. These are out of pocket expenses that you’ll need to have available and pay for before closing. These costs aren’t something you can tack on to your cash to close. Be sure to check out my other posts about Appraisals and Home Inspections for more info.

Loan Origination Fees: When obtaining a loan, there’s often a fee for the lender’s services. For conventional loans, this typically amounts to around 0.5% to 1% of the loan amount. So, for our $500,000 home, expect an origination fee of approximately $2,500 to $5,000.

Title and Escrow Charges: Securing clear title to your new abode is paramount. Title fees, averaging around $1,000 to $2,000, cover the title search, insurance, and related expenses. Things like, the lender policy, and Owner’s Extended Coverage. Additionally, escrow charges, typically 1% to 2% of the purchase price, cover the escrow agent’s services in handling the transaction.

Prepaid Items: To ensure a smooth transition, some costs must be paid upfront, such as property taxes, homeowner’s insurance, and mortgage interest. These prepaid items vary depending on the time of year and the lender’s requirements. As a rough estimate, expect to allocate around $2,000 to $4,000 for these items.

Closing Costs for Different Loan Types (Example: $500,000 Home):

• VA Loan: Veterans and active-duty military members enjoy the benefits of VA loans, including lower closing costs. While costs can vary, they typically range from 1% to 3% of the loan amount. For a $500,000 home, expect closing costs of approximately $5,000 to $15,000.
• FHA Loan: With an FHA loan, which caters to first-time buyers and those with lower credit scores, closing costs can amount to approximately 3% to 5% of the loan amount. For our $500,000 home, expect closing costs of around $15,000 to $25,000.
• Conventional Loan: Closing costs for a conventional loan generally range from 2% to 5% of the purchase price. For our $500,000 home, anticipate closing costs of approximately $10,000 to $25,000.

Remember, these figures are estimates, and costs can vary based on factors such as the lender, location, and specific circumstances. Consult with your lender for more accurate and up-to-date information tailored to your situation.

As you embark on the exciting journey of homeownership, be prepared for the financial adventure of closing costs.