Establishing Your Home Buying Budget
Be Aware of the Hidden Costs of Home Ownership
The cost of buying a house isn’t just the down payment and the remittance of the monthly mortgage payment. Not all of the costs associated with home ownership are reflected in the listed price. It can be quite surprising, particularly to the first-time home buyer, the unavoidable costs and the amount of cash needed to set aside for home ownership. If you’re considering buying a home, be mindful of these often-overlooked expenses when establishing your home buying budget.
Even Before You Close
Professional inspections should be performed. Although not required, home and pest inspections will point out areas of the property that are problematic or in need of repair alerting to any potential issues that may be coming up in the near future. Buyers can use this information as leverage during home price negotiations or simply to determine if the house is worth purchasing. The cost of inspections varies depending on the square footage of the property but will run you several hundreds of dollars. While a home and pest inspection may be adequate for a typical house in the city proper, country properties can require additional inspections of wells and septic systems.
Before you can purchase your home, your lender will require a valuation of the property performed by a professional real estate appraiser. Lenders use the appraisal when determining the amount of money to offer borrowers. The appraiser will require payment whether the deal goes through or not. Again, depending on who the lender typically uses and the square footage of the property, the cost of an appraisal varies but you can expect it to be several hundreds of dollars.
The Big Three
Taxes, as they say, are unavoidable and certainly true with property taxes. And homeowners insurance. Your monthly mortgage statement doesn’t just reflect the loan amount plus interest. It will also reflect property taxes and premiums for homeowners insurance, all of which borrowers are required to obtain. The cost of home insurance varies depending on where you live (i.e. people living in a natural disaster area can expect to pay more) and whether or not you purchase add-ons.
Property taxes are expressed as a percentage of your home’s value. When determining your baseline monthly mortgage payment the experts suggest looking at “PITI” or principal, interest, taxes, and insurance. These costs will vary widely but can run several thousands of dollars a year.
Note: When you put down less than 20% on your new home, the lender requires Private Mortgage Insurance (PMI), which is a policy that protects the lender from losing money if you end up in foreclosure. PMI is a policy you have to buy to protect the lender from you. Cost of PMI varies depending on the size of your down payment and your credit score. Additionally, supplemental home insurance may be required when purchasing in a designated flood zone; however, flood insurance is relatively inexpensive.
Commonly overlooked when purchasing a home is the cost of utilities. Many new homeowners are unpleasantly surprised by how much it costs to keep the house warm and the water running. Utility costs such as electricity, gas, and water must be budgeted into the costs of buying a home and consideration made for house and property maintenance costs. These costs will vary by region and consumption. It’s wise to get a sense of the costs by asking the sellers for monthly averages before closing the deal.
Our industry has not done a very good job educating the homebuyer when it comes to closing costs. In my experience, the hidden costs revealed during signing is the single most shocking event of the transaction, with most buyers coming unprepared knowing they will pay thousands of dollars in assorted fees. These expenses, known as closing costs, can include title insurance fees, processing fees, underwriting fees, and recording fees—all legitimate in order for the loan to be granted and title to real property be transferred. Be sure to ask your title company for the estimated costs at closing to eliminate any surprises.
If you‘re purchasing a condominium or a home in certain planned developments, Homeowners Association Fees are required to cover the costs of maintaining the common areas. In a condo this may include the patios, landscaping, pools, etc. In a planned development, it may include the maintenance of shared roads, a mutually shared water system, or access to a gated community. The fees will vary accordingly but can often run hundreds of dollars a month.
Once the home purchase is complete, a new set of out-of-pocket expenses may be incurred. Most likely you’ll need to hire professional moving services, especially if you’re moving any distance. Major expenses can add up quickly when furnishing the new home. Finally, repairs are inevitable. It’s recommended that new homeowners set aside funds to take care of unexpected repairs to appliances, etc. And depending on your future plans for your new home, it’s recommended setting aside some extra cash for various renovations and updates as they arise.