Understanding The Hidden Costs Of Home Ownership
You know that buying a home is likely the biggest purchase you’ll make in your lifetime. But the cost extends far beyond the purchase price of your new house. Before you jump into home ownership, understand the hidden costs to make sure you’re not biting off more than you can chew.
Things like property taxes, insurance, HOA fees, and maintenance and repairs all add to your monthly housing costs. Home inspection and appraisal fees, specialized inspections, closing costs, and your down payment also add to your bottom line. Determine the approximate costs of these factors to get a more accurate assessment of your home ownership costs.
If you're ready to become a homeowner, do your due diligence when researching the cost. Look at all of the components, from upfront costs to ongoing expenses, to get a clear picture of what your home is really costing you.
Uncover All The Costs Before You Buy A House
When you buy a home, you certainly consider the purchase price, but this number is only one piece of the puzzle. You also need to understand all of the additional fees and costs associated with the purchase. Then, beyond the principal and interest that comprise your mortgage, you need to add up insurance, taxes, and other ongoing expenses.
Are these costs really hidden? Do sellers, mortgage lenders, and real estate agents keep secrets and hide costs? No. But these additional expenses do often fly under the radar when it comes to first-time home buyers. It's more often a case of not being fully aware of all the costs associated when buying a home.
1. The Down Payment
In most cases, you must have a down payment when buying a home. The recommended amount is 20% of the purchase price, which allows you to get a conventional loan.
However, there are loan options that will accommodate lower down payments, like FHA or VA loans. Depending on which loan you qualify for, you may only need 3 to 5% down, or in some rare cases, no down payment.
2. Home Inspections
It’s unwise to skip the home inspection when you buy a house. Getting a home inspection provides you with a report of issues or potential necessary repairs. It gives you a better view of how much you’ll need to spend to make this house a safe home. An inspection also protects you from unexpected surprises down the road that could cost thousands.
When you get an inspection, if the report reveals major issues, you get the opportunity to negotiate a lower price or walk away. These choices are preferable to getting stuck with a lot of problems and unwanted expenses. An inspection costs between $350 and $550 or more depending on the home’s size, condition, and location.
3. The Appraisal
Unless you’re paying for your house with cash, you’ll need to get a home appraisal. Your lender wants to know if the house is worth what they’re lending you. An appraisal also gives you insight into whether or not you’re paying too much for a property.
An appraisal costs between $300 and $600 on average. What you pay depends on the age, size, condition of the home, and any special features that may require more research and work on the appraiser’s part.
4. Home Insurance
When you make a big purchase, you want to protect it and cover yourself in the case of major issues. Homeowner’s insurance provides this protection, and mortgage companies and banks will expect you to have insurance before they loan you any money.
Typically, your insurance premiums are rolled into your mortgage payment as part of your escrow. Depending on where you live, insurance may only cost you a few hundred a year, or it could be in the thousands. Homeowner’s insurance also tends to rise every year.
You also might need specialized insurance like flood, wind, or earthquake coverage. This additional coverage may or may not be mandatory for your loan.
For example, if your home is in a flood-prone area, your lender may require you to get flood insurance. However, if you aren’t in a flood zone, you may opt to not get it. But if areas near you tend to flood, you might still choose to get the coverage and pay for it outside of your escrow.
Do your research to determine what your expected insurance premiums will be. If you end up getting a homeowner’s, flood and a wind policy, you could pay $500 to $700 (or more) a month for coverage.
5. Property Taxes
Another addition to your bottom line when it comes to your on-going home expenses are property taxes. Property taxes have nothing to do with your lender. Your local county or city assesses your property tax amount based on your home’s value.
Taxes can range from under 0.4% to over 2%, depending on where you live. Some places offer homestead exemptions and other strategies to help lower your property tax bill. Property taxes also often come out of your escrow and can cost you anywhere from under $100 to over $1,000 a month.
Also, certain home improvements increase property taxes. So, if you add on or make large renovations, expect to see an increase in your monthly tax bill.
6. On-Going Maintenance
Owning a home takes work and commitment. Unless you want your house to fall into disrepair, on-going maintenance is inevitable. Things like cleaning, lawn care, servicing the HVAC system, cleaning drains, taking care of a pool, and other tasks are part of routine upkeep.
Many things are possible to do yourself with minimal cost and some of your time. But other things may require a professional. Also, you might need to invest in specific equipment, like a riding lawnmower or a snowblower, or protection plans, like a termite contract, depending on your unique needs.
The costs of maintenance will depend on your home’s size and features. But expect to set aside a portion of money each month toward regular upkeep.
7. House Repairs
In addition to routine maintenance, it’s also vital to build up a fund for repairs and replacing parts as they inevitably break down. For example, the typical lifespan of an asphalt shingle roof is about 15 to 20 years. You will likely deal with a clogged drain or toilet, an electrical issue, or a broken window. Stuff happens, so prepare for it.
How much you save for home repairs varies based on your home’s overall condition, age, and the quality of components. But an average is to save 2% to 3% of your home’s value annually. Some insurers, like State Farm, recommend saving as much as 4% every year.
8. All Of The Utilities
If you’re used to renting, then you might be lucky to have a landlord that covers some of the utilities in your rent. For example, some apartment complexes include water, sewer, and garbage bills. You only need to pay for electricity and things like the internet or cable.
Also, in most cases, albeit not all, the place you’re renting is probably smaller than the home you will buy. So, when you move into your new house, your utilities are likely to increase. Now you’re on the hook for everything, and they likely will cost more if you’re in a bigger place.
9. Don't Forget To Consider The Interest Rate
When deciding how much house you can afford, don’t forget to consider the interest rate. A loan at 4% might make owning a $300,000 home possible for you.
But if the rate is closer to 8%, that same house can become out of reach for your budget. Run the numbers to see what your final payment will be before you decide to make an offer on a home.
10. HOA Fees
If you purchase a home or condo with a Homeowners Association, you’ll also need to pay HOA fees each month. These fees typically cover maintenance and upkeep of the home’s exterior and certain services like garbage pick-up or landscaping.
HOA fees could be low, around $100 a month. But in some communities, they could cost hundreds a month, so you definitely don’t want to forget about them.
How To Budget For Housing Costs
After looking over all of the costs associated with owning a home, it’s essential to create a realistic budget. It’s also important to plan how you’ll save for your up-front costs, so you don’t end up in a tight spot.
In many cases, your insurance premiums and property taxes are included with your mortgage payment. If they aren't, take the total annual premium and divide it by 12 to determine your monthly costs. You could put this amount in a high-yield savings account each month and pay the bill in full when it comes due.
You can do the same thing for repairs and maintenance. Decide what percentage of your home’s value you are comfortable with based on the age and condition of your house.
For example, you decide a realistic figure is 2% of your home’s value. Your home is worth $400,000. Therefore, you need to save approximately $8,000 a year for repairs and maintenance. (If you bought a fixer-upper, you might want to steer closer to the 4% range, or $16,000 a year.)
Take this figure and divide it by 12 to get your monthly amount. Dividing $8,000 by 12 gets you roughly $667 a month that would go into a high-yield savings account.
The total in the account builds each month, and you pay for upkeep and repairs from this account. Keep in mind, this is not for things like new furniture, renovations, etc. If you’re planning a big renovation, you’ll want to start a separate savings goal.
Know The Real Cost Of Owning A Home
Buying a home is a milestone for many people, but it comes with a lot of hidden costs. Before you take the plunge into home ownership, get honest numbers about how much you need. Things like a down payment, home inspection, and appraisal add up quickly to raise your up-front costs.
You’ll also spend more than your mortgage each month once you add in property taxes, insurance, and maintenance. Budget wisely for ongoing upkeep and inevitable repairs to get a clear picture of what your home really costs you each month. Knowing the numbers before you buy will save you from making a big mistake that puts you in a financial hole.
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Stacy Randall is a wife, mother, and freelance writer from NOLA that has always had a love for DIY projects, home organization, and making spaces beautiful. Together with her husband, she has been spending the last several years lovingly renovating her grandparent's former home, making it their own and learning a lot about life along the way.
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