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It’s so easy nowadays to just go online and sift through properties that meet your criteria and price point, but most people don’t figure in the extra costs that come into play when purchasing real estate. If you’re a first time home buyer, you may not be familiar with the extra expenses that are involved with buying a home, and first time buyers aren’t alone. Even real estate veterans need to be updated or get a refresher course now and then.
The primary costs of house ownership are divided into two categories: one-time costs and ongoing costs. Down payments, closing charges, escrow prepaids, and mortgage points paid to a lender to get a reduced interest rate are examples of one-time costs. Your monthly mortgage payment, property taxes, homeowners insurance, utilities, and maintenance charges are all ongoing costs.
Here are 10 potential one-time and ongoing costs of owning a home that you should be aware of before you begin looking.
We’ll begin with the most obvious cost. When purchasing your first home, you will most likely need to secure a loan from a mortgage provider. So, unless you buy your house in cash, you’ll have to make a monthly mortgage payment. A portion of that payment will be applied to your principal debt, while the remainder will be utilized to pay insurance to your lender.
You must pay property taxes on your house every year. Property taxes might vary greatly depending on where you live. If you have a mortgage, you will usually pay your property taxes in monthly installments to your lender. The lender will place the cash in escrow and pay your whole property tax bill ahead of time.
If you have a mortgage on your home, you will almost certainly be obliged to keep a homeowners insurance policy. Even if you buy your house entirely, it’s a good idea to have insurance. Homeowners insurance can protect you in the case of a disaster, such as a fire. This is another expenditure that is often paid on a monthly basis. In reality, the frequently necessary combination of principle, interest, taxes, and insurance is commonly referred to as PITI.
It is important to note that some occurrences, such as floods, are not covered by standard homeowners’ policy. If you live in a flood-prone location, your lender may need you to purchase separate flood insurance, and in some hurricane-prone areas, windstorm insurance is also required. If you want to know what to expect in your local real estate market, talk to a local insurance agent about the needed (and optional) forms of homes insurance.
If you put less than 20% down on a home, your lender will almost certainly need you to purchase private mortgage insurance, which will be added to your monthly mortgage payment. FHA loans need their own mortgage insurance, although conventional and other mortgage borrowers can get private mortgage insurance, or PMI. This cost varies greatly based on the type of mortgage and the amount of money you put down. You can request to cancel your mortgage insurance after you pay down the loan to a loan-to-value (LTV) ratio of 80%.
Property taxes, homeowners insurance, and mortgage insurance are all often added to your mortgage payment and placed into an escrow account. Your escrow account, however, does not begin at zero; you will almost certainly be asked to make an initial deposit at closing. This will provide some reserves for your account in the event that your property taxes or insurance costs end up being greater than the lender’s initial estimate.
Closing costs are another expense that can vary greatly depending on your house, location, and a number of other factors. Closing expenses are typically 1% to 3% of the home’s purchase price, although they can be much more, particularly in low-priced homes.
Aside from the previously stated prices (points, prepaids), common closing costs include your lender’s fees for loan origination, processing, and underwriting, appraisal fees, title insurance, deed recording fees, document prep fees, and credit report fees, to name a few.
Most people who have an apartment paying monthly rent are used to paying certain utilities, particularly electricity, cable, and internet. When you purchase a home you must pay several utilities on a regular basis that you are not accustomed to. Water is frequently included in rental units, as are sewer and garbage collection costs. Be sure to budget for these when looking for a home.
If you’re moving into a neighbourhood, you’ll almost certainly be required to pay a homeowners association (or HOA) fee. These might vary greatly depending on your location and the services included by your HOA dues.
Here’s the greatest wild card cost you’ll have to budget for. Your house will require maintenance over time, and if you’ve previously rented, maintenance was most likely the duty of your landlord. Home maintenance expenses can range from basic charges such as changing air filters to substantial ones such as roof replacement.
As a general guideline, maintenance charges should be around 1% of your property’s worth every year (so $3,000 on a $300,000 home). This varies greatly from year to year and is substantially higher in older homes.
As you’ve seen above, there are many expenses associated with home ownership that can greatly impact your monthly budget. These expenses may come as a surprise to some people, especially those first-time buyers who have always dreamed of owning their own home. This article should help you realize the reality of owning a home and make sure you are on top of all of the financial commitments that come along with it.
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