You Can't Hide from These Hidden Costs of Buying a Home
Few things are as exciting as purchasing your own home - especially for first time homeowners. Part of maintaining that warm glow as long as possible is preparing yourself for some of the parts which aren’t as fun.
Let’s look at some of the hidden costs of buying a home so you can prepare yourself more effectively and have a better home-buying experience.
Closing Costs
Let’s go ahead and get this one out of the way first. We all know they’re coming, but first time homeowners are sometimes surprised just how many “closing costs” there are. Fortunately, most reputable realtors will manage the details and hook you up with the various agencies and paperwork involved. We’ll look at several of these individually below, but for now let’s talk big picture.
Plan on spending up to 5% or more of the total cost of your new home in closing costs.
It’s sometimes possible to roll this into your financing, but only if you’ve accounted for the additional expenses ahead of time. Keep in mind that every dollar you finance instead of paying up front means more interest, larger payments, or possibly a longer amount of time until your mortgage is paid in full.
What kinds of things get rolled into closing costs?
There are various appraisals required during the process, some of which the buyer is expected to cover. Typically you’re required to pay your first year of homeowner’s insurance up front, as well as property taxes for the first six months or more.
If your down payment is less than 20% of the total purchase price, the lender may require you to provide proof of private mortgage insurance (PMI) which protects them in case you’re unable to make your payments while your balance exceeds the value of the home itself. There are often escrow fees, loan origination fees, and a host of other things which you’re welcome to unravel and educate yourself about should you choose.
Rental property owners use rental property depreciation as an important tool for deducting the costs of improving or buying a property during its useful life, which also lowers taxable income.
For most of us, however, it’s usually best to simply prepare for the additional costs and simply pay them unless you have reason to question a specific amount or a particular charge.
All of this is contingent on having a reputable realtor, as mentioned above. Unless you buy and sell homes regularly on your own, we highly recommend using a professional. Yes, they take their cut - but it’s almost always well worth it to have someone who understands the process walking you through things.
Property Taxes
These are often rolled into your mortgage, making them easy to forget about. For first-time homeowners, however, property taxes can quickly become a source of headaches and stress they didn’t anticipate.
See, property taxes are estimated at the time of purchase. Hopefully, this estimation is based on comparable homes in the area, or previous property taxes on this specific home if you’re not the first owner. This estimate is not a guarantee of anything, however.
If your neighborhood or larger community is growing and doing well, property values may rise quickly. This is largely a positive, but when the value of your home goes up, so do your property taxes. Suddenly you get a little notice that your mortgage payment has increased $100 or more due to something about your escrow account being out of balance… that’s often because property taxes have gone up and there’s not enough set aside in escrow to accommodate the jump. It can be jarring if you’re caught off guard!
Many homeowners are also surprised the first time they do a little work around the house to make things nicer - fixing the back deck, repainting the exterior, or hiring a local company to remodel the bathroom. Suddenly, someone from the county is there looking things over and declaring your house is now worth more and you owe more property taxes. Again, this isn’t actually a bad thing overall, but it can feel like you’re being punished for taking care of your home.
Planning ahead of time for the volatility of property taxes will help reduce your stress and allow you to plan on offsetting any price increases in your first year or two of home ownership.
Homeowner’s Insurance
This is another one we mentioned in “closing costs” above, but it’s worth a short section of its own as well.
What your homeowner’s insurance does or doesn’t cover varies with your policy, but chances are good your lender will require you to at least have a policy providing for replacement of the home in case of disaster or major accidents. Most policies provide assistance in case of theft, fire, or other losses, as well as covering costs if someone outside the family is injured while on your property. Some policies even cover accidental damage done by yourself or your family while away - visiting a friend, staying in a college dorm, etc.
The point is, you’ll want to know your options and not simply go with the minimum required by your lender.
Talk to your current provider about what they can do, then compare options using the Goalry app to see if someone else can do more for you at a better price. As with so many things, knowledge is power - and Goalry is all about making information more available, more useful, and more effective for people just like you and me.
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Repairs And Maintenance
Speaking of home improvement, let’s talk about maintenance and repairs of your new home. If you’ve been renting or living with parents, it’s easy to underestimate just what’s involved in caring for an entire house.
If you’re buying a brand new property, there should be fewer problems - but this isn’t always guaranteed. Make sure you know what your warranties do and don’t cover so you’ll be prepared should anything go awry. Even if you’re purchasing an older home, your realtor may be able to hook you up with a short-term warranty covering unexpected problems with appliances or other built-ins.
The simple reality of home ownership, however, is that homes need maintenance sometimes. And guess who’s responsible for figuring it all out, no matter what comes up? That’s right - it’s you!
Toilets clog or stop refilling for some reason. Hot water tanks leak, or the water doesn’t get hot enough any more. Furnace filters require replacing. Water softeners have to be replenished with special salt. Your basement is too humid and mold starts to appear - or, worse, water seems to be leaking in whenever it rains. Lights flicker in uncomfortable ways, leaving you wondering if there’s a bad connection somewhere or you simply need better bulbs. Cold air finds its way into that one entryway no matter what you do to fill the gaps. Refrigerators stop refrigerating. Ovens stop ovening. Steps creek. Doors jam. And why does the living room get smokey every time you light a fire in the fireplace?
I don’t mean to overstate the problems. It’s actually pretty rare to realize a year or two in that you’ve somehow committed yourself to an absolute money pit. But if you haven’t been responsible for these sorts of things before, it can seem daunting the first few times something goes wrong or feels off. That’s why it’s important to plan ahead of time for periodic repair and maintenance expenses.
You’ll be surprised how many things you’re able to figure out how to do yourself using YouTube and some owners manuals. Other times, it’s better to call in a professional (which is a whole other adventure we won’t go into here).
Either way, understanding that repairs and maintenance are one of the hidden costs of buying a home reduces stress and increases your odds of making the right call.
Utilities
I know, I can hear it now. “Well, duh! I know I have to pay utilities!” I know you do. It’s not the existence of these costs which are sometimes a surprise, but the amounts.
Your realtor probably provided you with some average or estimated utility costs when you were looking at the home in the first place. Most realtors are above board about this sort of thing and I tend to take them at their word.
Where things can take an unexpected turn, however, is when you don’t operate in the “average” way. Maybe you like it nice and cold during the summer (especially at night) so you keep the air conditioner at 68 degrees. That’s fine, but expect your electricity to run a bit higher than “average.” For me, it’s those long hot showers during the winter - especially in our newly remodeled bathroom (which bumped up our property taxes). Great water pressure and a huge hot water tank make it easy to just steam away the cares of the world for an hour at a time… until the water bill comes in and reflects all that additional usage.
Even if you’ve been paying utilities in an apartment, you probably haven’t been paying as many as generally come with a home. Even before the optional stuff - streaming services, internet, pest control, etc. - there’s trash collection and sewer fees and other things not normally considered when renting. Your house is probably bigger than your apartment as well, meaning more square footage to heat or cool and more places to plug in things which are on all the time even when you’re not using them. Throw in a mysterious water leak or leave on a few extra lights, and the costs quickly add up.
Moving Expenses
Yeah, I know - this is another “duh,” right? Only it’s not, especially if you haven’t moved in awhile.
See, moving expenses involve more than the cost of a truck or buying pizza for a few friends. There’s the cost of eating three meals a day while everything’s being packed up to begin with and for however long it takes to get it unpacked and put away so you can prepare food in your new home.
There are those unexpected expenses of the move itself - gasoline, replacement items for those shoes we can’t find, that microwave that got dropped, or those extra nights in the hotel when the truck ended up in Des Moines despite their promises it couldn’t possibly take more than three days to get you from Houston to Arlington.
Americans are also accumulators. If you’ve lived anywhere for more than a year, you may not think you have that much stuff until it’s time to pack it and transport it from one place to another. Even moving across town can take far longer than anticipated as it seems there’s always one more load of stuff (and never enough boxes of the right size no matter how many you thought you’d saved along the way).
Moving can be exciting. Fun, even. It’s a wonderful chance to rethink your surroundings and purge your unwanted stuff. But it’s also one of the sneakiest hidden costs of buying a home - hiding right there in plain sight until suddenly you realize the dollars are adding up!
Adjustable Rate Mortgages (ARM)
Most mortgages are the adjustable rate variety. Your initial interest rate may be locked in for the first year or more, but few lenders will commit to today’s rates for the next fifteen or thirty years.
That means that your house payment can change - sometimes dramatically - with little or no warning, and completely out of your control. The average citizen has little or no control over the national economy or interest rates, so all we can do is be as prepared as possible.
In some cases, refinancing may be an option. This usually only makes sense if rates have dropped substantially since you first financed your home or if you simply must lower your monthly payments by stretching out your balance to a longer term. Refinancing your mortgage can be a positive step, but it should never be taken lightly or done casually. If you find yourself considering refinancing, Goalry can help you decide whether or not this makes sense for you and your specific situation.
Conclusion
Buying a home can still be a wonderful experience. There’s nothing quite like settling in somewhere you know is finally and truly YOURS. The key is preparing as best you can for the most likely hidden costs of buying a home so they don’t undercut that joy.
You’ve no doubt discovered those nifty little “how much mortgage can I afford?” calculators online. You input a little information about yourself and what you think you can pay monthly, and they crank out a price range of homes for you to consider while shopping. These are wonderful tools, but most experts recommend against taking that top number too seriously. You don’t want to max out your ability to pay each month before the hidden costs of buying a home are factored in!
It’s also important to be realistic about the information you input in the first place. Just like it’s a mistake to buy clothes in the size you wish you were instead of the size you are, it’s a bad idea to input income or balances you wish you had instead of reality as of today. (It’s just you and the computer. Who are you trying to impress!?)
Many experts recommend automatically reducing your “potentially affordable” price by 10% or 20% before you even begin shopping. It’s very unlikely you’ll find yourself complaining a few years from now that you have way too much money left over for emergencies or entertainment.
Finally, keep in mind that Goalry mall is here every step of the way. We’ll never tell you what home to buy or how to spend your money, but we can help you compute more realistic real estate values, compare mortgage rates or insurance options, and offer expert insight and advice for both first-time and long-term homeowners. We tap into the collected experiences and hard-won wisdom of a wide variety of experts to bring you practice methods of lowering your monthly expenses, reducing debt, improving your credit score, and increasing your options moving forward. Have fun shopping for that new home! Let us know how we can help.