When buying a home, there are several costs homeowners must consider that are not covered by the mortgage loan. These additional expenses include homeowner’s association fees, utilities and repair costs.
Understanding these additional costs will help you avoid being “house poor,” where you spend so much of your income on housing that it limits other discretionary spending. This article will cover 5 costs to budget for when buying a home.
1. Down Payment
One of the first costs homeowners must consider is how much to put down. The amount you need to pay upfront is generally a percentage of the home’s purchase price, while the remainder is paid with a mortgage or home loan.
Typically, you’ll need to make a down payment of 20% or more of the home’s purchase price. However, it’s possible to buy a house with less than 20% down if you qualify for a specific mortgage program.
It’s important to avoid putting down all of your savings toward the down payment, because it may stretch your finances too thin. It’s also a good idea to keep an emergency fund in case expenses arise during homeownership. This could include anything from a leaky roof to an unexpected illness.
2. Closing Costs
The down payment isn’t the only amount you’ll need to bring to the closing table. Closing costs are one-time fees charged by lenders and third parties to process the loan. They also include prepaid expenses such as property taxes, homeowners insurance, and mortgage insurance premiums.
Most lenders list closing costs in a document called the Loan Estimate that you receive within three days of submitting your mortgage application. Those closing costs are typically around 2-5% of the home purchase price.
Buyers can sometimes negotiate seller concessions to pay some or all of their closing costs using sale proceeds. But this arrangement increases the mortgage principal, and therefore, your monthly payments. The lender may also allow you to buy down your interest rate by paying discount points, which are additional upfront charges that reduce the annual cost of the loan.
3. Utilities
Homeownership comes with a number of different fees that you may not be aware of. Some are upfront costs, while others come each month or seasonally. These include utility costs, homeowners insurance and property taxes.
Before buying a home, it’s important to estimate the cost of utilities. This will help you budget and plan accordingly. It’s also a good way to see if the house you’re
interested in is efficient enough to save money on energy bills.
A real estate agent can help you get a better idea of what utility costs will be in a particular area by asking for previous electric, water and gas bills. This will give you a ballpark figure of what to expect. You can also use online tools to calculate average costs in a given area.
4. Repairs
While touring homes is fun, it’s important to be aware of the ongoing maintenance costs associated with homeownership. Regardless of the age and size of your new home, wear-and-tear will happen, and that’s why you should always budget for repairs.
Some experts recommend that homeowners save 1% of their home’s purchase price to cover annual repair and maintenance expenses. However, this number can vary based on the exact location and size of your home. Others recommend a home warranty as an investment and peace of mind when it comes to repairs. Educating yourself is important so that you know your home warranty options or what the warranty covers altogether.
Other rules of thumb to consider include the square foot rule, which suggests you should save $1 per livable space within your home each year. And don’t forget to account for interior design costs, which can include furniture, window treatments
and fixtures. A recent survey from insurance company Hippo found that most new homeowners experience a major repair within the first year of owning their home.
5. Taxes
When you buy a home, there are a variety of one-time costs that must be paid. These include closing costs, a home inspection and a title insurance policy. Closing costs typically fall between 2% and 6% of the purchase price.
New homeowners should also budget for property taxes and homeowner’s insurance. Some lenders will have you pay these through an escrow account, while others may require that you pay them in a lump sum each year.
It’s also a good idea to set aside money for unexpected expenses, such as maintenance or repairs. One rule of thumb is to save 1% of your home’s value each year for maintenance costs. Buying a house can be an exciting milestone, but it comes with many hidden and not-so-hidden costs. Budgeting for these expenses can help ensure that a mortgage is within your comfort range and keep you from overspending or taking on debt.
