There are many costs associated with purchasing a home. The obvious ones are the closing costs which include home appraisals, and home inspections. Most realtors do an exceptional job of outlining all the costs associated with purchasing the home. They even provide checklists with itemized costs needed to complete the process. However, what about the cost after the purchase of the home. These hidden costs of owning a home can add up and you need to be prepared to deal with them to avoid being house poor.
We learned a lot about being house poor after purchasing our first home. We used all these learnings when we purchased our second home to avoid that pitfall.
Let’s review the cost associated with buying the home. Indulge me with this quick overview of costs you may or not be aware of. These upfront costs will impact what you have available in your savings account after you purchase your home.
Closing Costs are not hidden costs of owning a home
Included in your realtor checklist will be the following amounts you will typically pay at the closing. However, some items may have to be paid upfront.
Earnest Money is paid once you have found a home you wish to purchase. It is a form of good faith indicating the seriousness of purchasing the home. Earnest money is to protect the seller should the buyer decline to move forward with the sale. It is typically about 1 to 3%. Based on the current market it could be as high as 5 to 10%. This fee may not be refunded should the buyer back out of the deal. Buyers can protect themselves by having a contingency clause should the house not pass inspection.
The loan origination fee is typically 0.5% to 1% of the loan amount. This is what the lender will charge you for processing your loan application for the home you wish to purchase. Some lenders will negotiate this fee with you but this could raise the interest rate for the life of the loan.
Mortgage Points are fees the borrower pays the mortgage lender to lower the interest rate on the loan. That is why it is also referred to as discount points. Depending on how many points you wish to pay will determine the final interest rate. It can reduce your interest and the amount you pay over the life of the mortgage.
The average down payment for a home is 6%. This is far less than the 20% typically paid upfront to purchase a home. Some conventional loans will allow 3% but most have a 5% minimum requirement. If you qualify for a USDA loan or a VA loan you may be able to purchase a home with no money down.
Third-Party Fees are cost directly associated with the home you wish to purchase
The buyer is required to pay for the Home Inspection. This fee can be paid upfront or can be included in the closing cost. This is a very important fee as it allows the buyer to review the overall state of the home. It can in some cases foretell the buyer of future expenses. Therefore, this is a very important step for making this very large purchase.
Here again, the buyer is required to pay for the Home Appraisal or Home Assessment. This is required by the lender when taking out a mortgage on the house. The Lender will hire a third party to appraise the property. If the appraisal is above the contracted price this is great news. However, if the appraisal falls below the contracted price, you will be required to pay the difference to move forward with the sale.
Title Insurance paid by the buyer is insurance to protect the lender. It protects against legal and financial damage if another party were to try and claim ownership of the property at a later date after the home has been purchased.
A Land Survey if requested tells the buyer all the information regarding the actual property they are purchasing. This could include the property boundaries, fencing, easements, and encroachments.
Hidden Costs of owning a home found in The Mortgage
There are additional costs included in your mortgage. That was talked about in the closing process. Such as Escrow, taxes, and home insurance. When you take over the house you are taking on the balance of the yearly property and school taxes. They may be fuel left in the seller’s oil tanks if the home is fueled by oil or propane. These fees could be nominal but they are your responsibility. All these hidden costs of owning a home could come as a surprise to new homeowners
The Escrow. What does Escrow mean? Who manages the escrow account. An escrow account is a savings account maintained by the mortgage company that services your mortgage. The mortgage service company could be the holder of your loan or not. Their responsibility is to send out monthly statements, set up payment options, review your escrow account yearly and make adjustments. They are available to answer any questions regarding the loan. The Escrow account is affected by Property Taxes, School Taxes, Homeowners Insurance, and in some cases the Homeowners Association Fees (if included in your mortgage payment) which could change annually. More about this is below.
Private Mortgage Insurance, also called PMI, is mortgage insurance is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan per the Consumer Financial Protection Bureau. Learn more from them about PMI here. You will be required to pay for this insurance until you reach 22% equity in the home. Equity is the difference between what you owe on the mortgage and what the home is worth.
Hidden Cost after you purchased the home
It is move-in day. Moving costs depending on location and the number of items to be moved can be a bit pricy. For homeowners, this could be up to $11,000. You will need to budget for this and shop around for the best deals. However, if you are moving from a small apartment to an average home you may need more furniture. Especially, if you are increasing bedrooms and overall living space. Purchasing and delivering new furniture can also be expensive. Hence, you may also want to make it your own with paint choices and home accessories.
Finally, the utilities may increase. For most first-time buyers the new home is larger than their old apartment. This could mean higher gas, electric, and water bills. Request past utility bills from the seller, hire a home energy auditor or use the Online Utility Usage Calculator from the U.S. Department of Energy. These hidden costs of owning a home can be a budget buster if you are not careful.
Hidden costs of owning the home after you move in
Once you become a homeowner you are responsible for all the emergency and maintenance issues of the home. You are your landlord and with that comes the responsibility of handling all emergencies. You have to be prepared to fix them yourself or call someone to fix them for you.
Many emergency repairs could occur after you purchase the home. Such, as a leaky pipe. Leaking water can cause a tremendous amount of damage before you are even aware that you have a situation. Severe weather, clogged gutters, washing machines water supply leaks, condensation from AC, and blocked drains are some other causes of water damage. Water can damage walls, floors, and furniture. You will need to be prepared to resolve all these issues with or without your insurance company.
Maintenance issues such as having the furnace or air conditioner service annually are now your responsibility. Just like you maintain your car the home must be maintained too. You will have to keep up the landscaping, maintain your home appliances, and pay for termite and pest control. However, some expenses may exceed your emergency repair fund or should be added as an additional expense to your budget.
High-End Home maintenance and repairs
Some hidden costs of owning a home can be really expensive. Maintaining and repairing a roof, replacing heating and air conditioning, updating and maintaining electrical and plumbing and, windows are all high-end items that can cost from $10,000 to $15,000 to replace.
Other items such as flooring, decks, driveways, and appliances can also be costly depending on the amount needed and the material or brand you wish to purchase. Some of these may be considered luxury items but they can be a factor in the hidden costs of owning a home.
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Emergency Fund for hidden costs of owning a home
I highly recommend that you set up an emergency fund for the house. This fund should cover home insurance deductibles should you have to make a claim. It should also cover unexpected expenses for at least $2,000. This should cover the cost of replacing some appliances. It should also be used for home maintenance and repairs that are considered emergencies. Finally, it should cover the cost of increases to the escrow account. I would plan to have at least $5,000 to $10,000 in savings.
For personal expenses, the standard 3 to 6 months of an emergency fund should be enough. This is in addition to the money saved for a home emergency. I prefer to keep these two emergency funds because you can never have enough money saved for emergencies and I plan to be prepared come what may.
Hidden costs of owning a home that can increase the Mortgage
Some people believe that once you purchase your home and receive your mortgage payment that unlike rent monthly payments will never increase. This is just not true because the taxes tied to your mortgage do go up. Like income taxes and state taxes, which all go up from time to time. Property and school taxes are no exception. However, these taxes affect your home mortgage. Also, If your municipality reassesses your home and increases its value or increases the tax rate your mortgage will go up. In addition to your insurance rate going up that will increase your mortgage payment.
Finally, all these costs will ultimately increase your escrow. The amount of money the mortgage must hold to cover these expenses. Every year the mortgage companies calculate your escrow rate based on the cost of taxes and insurance. On rare occasions, this can go down if one or more of these expenses are reduced. However, most time this will go up. Your mortgage company will provide this information in writing you have two options to reconcile the discrepancy. One lump payment to reduce the amount your mortgage will increase or pay it over time with a guarantee of a larger increase for your mortgage payment.
Refinance Costs Are good Hidden Costs of Owning A Home
Refinancing a home to reduce your current interest rate is a very cost-effective way to reduce your payments or reduce the term of the loan. There could be Closing Costs (again unless waived). However, this is a great time to think of cashing out some of the equity in your home for some of the big-ticket home improvement projects. Please note that this is not an equity loan because the amount will be refinanced in your new mortgage. A home equity loan is a second mortgage on your home which you will be required to pay back in addition to your current mortgage.
This is also the opportunity to shorten your current loan from 30 years to 15 years, or you could re-up for 30 years again. With the 15 year refi, you shorten the term but could increase the mortgage payment. With the 30 year refinancing, you will lower your current mortgage payment. However, if you wish to shorten your term you could increase the amount allocated to the principal with an extra payment.
You Cannot Avoid These Hidden Costs of Homeownership but…
You can keep your costs down as low as possible so you do not become house poor and these additional costs will not be a burden.
- Buy less home than the bank says you can afford
- Do not allow your mortgage payment to exceed 28% of your gross income
- Save an emergency fund for the home
- Learn how to do some home repairs to save money
- Create a budget beforehand with anticipated cost
- Ask the seller to provide samples of utilities
- Research the taxes of homes in the area and how they have been trending
- Put off any major purchases that will increase your debt
- Increase your 3 to 6 months emergency fund to include the new monthly expenses
Recap of homeownership costs
- Ernest Money (1% to 10% based on the market)
- Loan Origination Fee (0.5% to 1%)
- Mortgage Points (0.125% to 1%)
- Down Payment (3% to 20%)
- Home Inspection ($300-$500)
- Home Appraisal / Assessment ($300-$450)
- Title Insurance (a few hundred to $2,000)
- Land Survey ($200 to $1,000)
Recap of hidden costs of homeownership
- PMI (0.58 to 1.86% of the original amount of the loan)
- Moving expenses ( $8,000 to $11,000)
- Furniture / Home Accessories
- Utilities (request copies of utilities from seller)
- Maintenance ($100 to $1,000)
- Repairs / Replacements ($1,000 to $15,000)
- Increased Savings ($5,000 to $10,000)
- The Escrow account (1% to 2%)
- Refinance costs (Based on current markets)
For this world is not our permanent home; we are looking forward to a home yet to come.Hebrews 13:14 NLT
I hope you found these tips on the hidden costs of homeownership helpful. If you are still looking to purchase a home please use this Home Buyer Savings Calculator.
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