How to eliminate surprises and “gotchas” during the home buying process.
What does it really cost to buy a home? Can you afford it? You obviously have to pay the purchase price and mortgage interest, but what else is involved?
Potential homeowners are often surprised to discover just how many hidden costs there are in buying and owning a home. Many of these aren’t even hidden at all, but are common things people are aware of but overlook when thinking about the cost of home ownership, such as utilities and maintenance costs.
It’s hard to pin these costs down exactly, because they vary widely from home to home, according to such factors as size, age, location, condition, amenities, mechanical systems and more. But generally speaking, you need to account for and have a reasonable estimate for each of the following before making the decision to buy.
Purchase Costs. This is the big one. Obviously, as mentioned above, there’s the purchase price and mortgage interest that you need to account for. But that’s only the beginning.
Any time you buy a home, you’re going to have closing costs. Some of these are part of buying the home itself; others are part of taking out a mortgage. These include origination fees (what the lender charges up front for making the loan), home inspections, home appraisals, title work, discount points, attorney fees, transfer taxes and the like.
Generally, you can expect to spend about 2-4 percent of the purchase price on purchase costs overall. If you get an FHA loan, you’ll pay another 1 percent upfront for mortgage insurance, in addition to annual mortgage insurance premiums (see below).
Down payment. The biggest upfront cost is typically your down payment. Most home buyers are going to need to put down at least 5-10 percent of the purchase price of the home in order to qualify for a mortgage. FHA mortgages allow you to put down as little as 3.5 percent, but you’ll pay less in annual insurance premiums if you put down at least 5 percent.
Borrowers who put at least 20 percent down usually get lower borrowing costs than borrowers who put down less, primarily because they don’t have to pay mortgage insurance. Those who put down less than 10 percent on conventional loans also tend to pay slightly higher interest rates.
Mortgage add-ons. These really aren’t part of your mortgage but they’re typically billed along with your mortgage payment, so we’re including them here. Property taxes, home insurance and mortgage insurance (if required) are all billed as part of your mortgage statement. Property taxes are based on home value and vary according to the community where you live, while home insurance typically averages about $600-$1,000 a year, depending on what state you live in, with southern states tending toward the higher end.
Mortgage insurance is what you pay if you put down less than 20 percent on your mortgage. Private mortgage insurance (PMI) is charged on conventional mortgages and is an annual charge equal to about half a percent of the amount borrowed. FHA annual mortgage insurance is a fee equal to 1.10-1.15 percent of the loan amount on a 30-year loan, depending on the size of your down payment. Both PMI and FHA insurance are billed as 1/12 th of the annual charge on your mortgage statement each month.
Utilities. Utilities are a recurring expense that many prospective homeowners fail to account for. If they do, they often fail to realize just how much they’ll be paying. Utility costs for a home tend to be significantly higher than they are for an apartment, largely because single-family homes are larger and less efficient to heat (apartments have fewer exterior walls).
Homeowners often find themselves paying for additional utilities they didn’t have to worry about as renters. Water, sewer and trash services are commonly included in rents but homeowners must pay for them separately. Electrical and gas service also must be accounted for, along with television and Internet service, although renters-turned-homeowners may already be accustomed to paying for these.
Move-in costs. This is one that can surprise people. First, you need to account for the cost of hiring a moving company or a van to move your belongings. Second, a new home often requires new furniture, carpet, appliances or upgrades to get it into desirable conditions.
While something like new furniture is a cost that can be deferred, things like carpeting, painting, refinished floors, major appliances and certain repairs and renovations are things that most homeowners find easiest to do at moving time. These things also help make the house feel “new,” which is also a factor for many homebuyers.
Maintenance and repair. Owning a home inevitably means maintenance costs. This can mean anything from calling the plumber to unclog a drainage pipe to replacing a furnace in the dead of winter to replacing the roof. Eventually, you’re going to have to pay for these things.
You want to make sure you have enough of a cash surplus to keep up on routine maintenance jobs such as periodically servicing the water softener and furnace, as well as being able to handle emergency expenses of several hundred to several thousand dollars, such as if your furnace gives out or you have to replace your washer or dryer.
You’re also going to want to acquire a number of items for home upkeep. These can range from major purchases – such as a riding lawnmower if you have a lot of property, or a snowblower in northern climates, to such things as ladders, rakes, shovels, vacuum cleaners and a host of little things that can add up quickly. Again, some of these can be acquired over time, but you’ll be surprised how many you’ll want right away – and how quickly they add up.
Homeownership can be a source of great joy and personal satisfaction, but it can also be a real burden if you fail to fully plan for all its demands and the costs they will bring. Making a good estimate of what costs will be for the needs of your particular home in your area can help you avoid unpleasant financial surprises.