Buying a House? Don’t Forget This Part
When you’re preparing to buy a home, the down payment usually gets all of the attention.
And while that’s an important piece of the puzzle, it’s not the only expense you’ll need to plan for. One of the most common surprises for buyers is just how much closing costs and prepaids can add to the bottom line.
If you’re only saving for your down payment, you might find yourself scrambling as closing day gets closer. Let’s break down what these costs are, how much you should budget, and why planning ahead makes the process far less stressful.
What exactly are closing costs?
Closing costs are the fees you’ll pay to finalize your mortgage and officially take ownership of your home. These can vary depending on your lender, your loan type, and even the city or state where you’re buying.
Common closing costs include:
Loan fees: Origination, underwriting, and processing costs charged by your lender.
Appraisal and inspection: Professional assessments of your home’s condition and value.
Title and recording fees: To ensure the property legally transfers into your name.
Taxes and government fees: State, county, or city costs that apply to your transaction.
WHAT ARE PREPAIDs?
Prepaids are different. These aren’t lender fees but rather upfront costs you’ll need to pay before you move in. Think of them as the “first bills” that come with homeownership.
Prepaids can include:
Homeowner’s insurance: Your lender will typically require the first year’s premium to be paid at closing.
Property taxes: Depending on timing, you may need to prepay several months of property taxes.
Mortgage interest: You’ll cover the interest for the days between closing and the start of your first mortgage payment.
Escrow account funds: A cushion to ensure your lender has enough set aside for future taxes and insurance.
how much should you budget?
A simple rule of thumb is to plan for about 6% of the purchase price in cash:
Roughly 3% for your down payment (if you’re putting down the minimum).
Another 3% for closing costs and prepaids.
This can vary, of course. Depending on your loan program or local tax rates, you might spend a little less- or a little more.
A REAL LIFE EXAMPLE
When I purchased my $558,000 home in Minneapolis, here’s what my numbers looked like:
Loan costs: $5,032
Taxes and recording fees: $1,369
Prepaids: $5,893
Initial escrow: $5,247
Miscellaneous: $525
All in all, my closing costs came out to just over $18,000. And that was on top of my down payment.
It adds up faster than you’d expect, which is why planning for both pieces is so important.
THE BOTTOM LINE
Buying a home is one of the most exciting milestones you’ll reach, but it comes with more financial layers than most people realize. If you only save for your down payment, you risk feeling blindsided at the finish line.
By budgeting for both your down payment and your closing costs, you’ll set yourself up for a smoother, less stressful buying experience.
Want to dive deeper? I’ve put together a free buyer guide that walks you through everything- from financing options to tips for navigating the final walkthrough. Reach out, and I’ll send it your way!
XO,
Jen
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