All the Hidden, Unexpected Costs of Buying a Home
Your home is probably the most expensive thing you have ever owned, and these costs exceed the closing price. There is the cost of a home, but there are other running and upfront costs that can take you by surprise. Especially if this is your first time buying, it helps you understand what you are getting yourself into.
Zillow estimates that, on average, Americans pay about $ 9,000 a year in additional costs of owning a home , but that depends on where you live and how you buy. Some of these costs are not entirely hidden, but they are often overlooked. Let’s take a closer look at them.
Home inspection
You made a house proposal and it was accepted. Hooray! From here, inspections will be your first big expense. Yes, there can be more than one check.
Before you officially close your home, you need to schedule a thorough background check. In fact, your lender will probably even require one. At a minimum, you want to order a general inspection of the house and an inspection for wood-killing insects (also known as termites) if this is not part of the total. A general examination will cost you several hundred dollars, and termite will probably cost you about a hundred. Depending on the age and condition of your home, you might also want to schedule a sewer inspection, which can cost you a couple hundred more dollars.
This can all be well over a thousand dollars, but it’s a small price to pay to make sure you don’t get a lemon. If the home requires significant renovation, you can renegotiate with the seller, abandon the deal entirely, or simply budget for additional costs.
In some states, if a previous buyer abandoned a purchase but did conduct a home inspection, the seller must report the inspection. That being the case, unless your mortgage lender requires you to do your own due diligence, there is nothing stopping you from skipping the due diligence altogether. After all, you already have a report. Nevertheless, in any case, it is better to undergo a self-examination. This is a large purchase, so be careful. In addition, you want to be there during the check so that you can see everything with your own eyes .
In some cases, lenders also require survey costs. It could be a few hundred more dollars, but you will get a professional survey of your property so you know exactly where your boundaries are.
Closing costs
After your proposal is accepted, your lender will calculate some numbers and carry out the paperwork. At this point, they should provide you with a detailed list of your closing expenses. According to Zillow , the closing costs will cost you between 2% and 5% of the purchase price of the home. Therefore, if you are buying a home for $ 200,000, expect to spend between $ 4 and $ 10,000. These costs usually include :
- Lender Fees: These include everything from administrative costs to bank transfer fees and fees for getting your credit report.
- Appraisal : Appraising a home can be expensive, in the hundreds of dollars. The lender wants to make sure that the house is up to the sale price.
- Title Deeds or Attorney Fees: Government filing fees, escrow fees, notary fees, and any other costs associated with transferring a document to you.
- Escrow Fee : You may be required to deposit some property taxes and insurance into an escrow account in advance.
- Interest : You will need to pay interest prorated from your closing date to the first of the next month.
You can always insert a few numbers into the closing cost calculator to get a more accurate idea of how much you will pay, but in general, expect to spend a few thousand dollars on top of your down payment when you close your home.
Current tax and insurance budget
Monthly mortgage calculators tell you what your monthly mortgage payment will be, including interest. They don’t always include taxes and insurance, however, and it adds up. For example, if you have a $ 200,000 mortgage at 4% per annum for thirty years, your mortgage and interest would be $ 954. Not so bad. But calculate your total monthly mortgage principal, interest, taxes, and insurance. (PITI) , and this is what your payments look like:
This is a real leap! It doesn’t even include mortgage insurance, which you usually have to pay if your down payment is less than 20 percent. This can range from 0.5% to 1% of the loan value.
Of course, your taxes will vary based on the value of your home and where you live, but WalletHub reports that the average US homeowner pays around $ 2,000 a year. That’s around $ 1,000 for homeowner insurance , but again, this varies slightly.
Depending on the terms of your loan, you may be able to deposit this amount into an escrow account (also known as a forfeiture account) on a monthly basis. In this case, you make these payments to your lender and he will pay you taxes and insurance on your behalf. If you don’t have an escrow account, you just pay them yourself when they are due.
However, no matter what you pay, be sure to budget for ongoing recurring costs. The good news, however, is that you can deduct property tax and mortgage interest from taxable income, so you pay less taxes every year.
Keep your maintenance and repair funds close at hand
When your air conditioner fails as a renter, it’s frustrating, but all you have to do is call your landlord and hope for the best. As a homeowner, this is a little more painful because you have to pay for the repairs yourself.
Most people know that owning your own home means spending money on your own maintenance, but you can underestimate how many of these projects you will need. Trapped waste, leaking faucets, and cracked paint on the outside are just a few of the renovations that take most aspiring homeowners by surprise.
Every home is different, so there is no one-size-fits-all answer to how much you are going to pay for maintenance each year. However, here’s what one financial planner told The New York Times , based on his own experience with clients:
Stearns estimates that new home owners who do some of the work for themselves but outsource more work to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it is an older home.
According to other sources, this number is only one percent. It’s almost always a good idea to be careful when you’re dealing with money, so it doesn’t hurt to have about four percent of the purchase price for renovations in your budget every year. For a $ 200,000 home, that’s about $ 8,000. This seems like a lot, but even if you don’t spend that money, consider it a back-up fund for your home.
Prepare for Higher Utility Bills
Let’s say you’ve moved from your cramped apartment to a beautiful three-bedroom home. Elbow room is great, but it also means your bills will be slightly higher.
Depending on what you are used to paying, your gas, electricity, and water bills may not necessarily be higher when you buy a home, but often they will. In addition, your landlord may pay some expenses (such as garbage collection or water) that you will have to pay if you own it. According to the latest US Census data , homeowners pay a couple thousand dollars more in utility bills each year than tenants . Here’s a breakdown:
Of course, this is an estimate based on national data, so again, your own numbers will differ. To get an idea of what your own situation will look like, the Money Pit home site suggests asking the seller if you can take a look at their past accounts:
Your realtor can arrange this through the seller’s realtor or, in the case of a home for sale by the owner, request an invoice directly from the seller. Use this information as a guide, remembering that annual changes in climatic conditions and energy use patterns by a new mix of inhabitants will lead to change.
This may be unlikely, but it is probably the easiest way to find out how much you will pay. You can also order an energy audit of your home using a home energy assessment system. This basically includes an audit of your home to tell you how to make it more energy efficient. However, according to This Old House , it will set you back about $ 400. You can do general repairs yourself by checking the insulation, looking for air leaks, and possibly replacing some appliances and air conditioning systems.
Buying a home has traditionally been considered a smarter financial decision than renting . The argument is that when you rent you are throwing money away, but when you buy, in the end you become the owner of your home. Of course, if you compare the cost of renting to the minimum cost of a mortgage, this may be true. However, all of these additional costs add up. And like your rent, those costs don’t really buy you anything: it’s just the price you pay to own .
However, even with these costs, buying in many areas is a better long-term financial solution than renting. You want to calculate for yourself, considering all these unexpected costs. ( The New York Times Rent and Buy Calculator is probably the best tool we’ve seen for calculating these numbers.)
Either way, once you make the decision to buy a home , be prepared for the price you will actually pay. With these costs in mind, you should be on the right track.