Home ownership offers many benefits to quality of life. In many ways, buying a home is a life-changing decision. If you’re contemplating your first home search, it’s a good idea to take stock of the financial responsibilities beyond a mortgage before starting the home buying process. Certainly, the mortgage is the most expensive and serious financial piece of purchasing a home, but there are many other costs you may not have thought much about after living as a renter. We’ve put together a list of the more common “hidden costs” of home ownership that first-time buyers need to consider.
1. Property Taxes
Property taxes are collected every year from home owners. This money is used for public schools, local government employee salaries, libraries, public parks, sanitation, police and fire protection, sewer, roads, and other public needs. When searching for a home, make sure you always know the annual property taxes due on the specific home you’re considering. Since property taxes are usually collected semi-annually, be sure to double the number you see for the annual amount! Lenders will often roll this amount in with your mortgage. Depending on where you choose to live, the property tax amount could be thousands higher than expected.
2. Earnest Money
When making an offer on a home, earnest money is an initial outlay of cash offered to the seller with your offer. It’s purpose is to show your offer is serious. If the deal goes through, you typically apply it to the cost of the home as part of your down payment. If the deal fails, you may or may not get the money back, based on the terms of the contract or how the deal fell through. It’s the buyer’s choice how much to offer. Usually earnest money is anywhere from several hundred to several thousand dollars. Some real estate agents recommend offering 1% of the purchase price.
3. Home Owner’s Insurance
Every lender requires a home to be insured. This is an additional expense that is typically lumped in with the mortgage. But it’s important to factor in this extra cost and know that it could go up or down depending on your coverage needs.
4. Private Mortgage Insurance
If you can’t afford to put at least 20% down on the home’s purchase price, you will pay PMI, private mortgage insurance. This is an additional insurance cost that lenders require to offset their own risk in case you default on your loan. PMI is typically 0.5 to 1% of your loan amount per year.
5. Closing Costs
Buyers typically pay for closing costs. The exception is when sellers have agreed to pay them in the purchase contract as a buyer incentive. Closing costs are all the miscellaneous fees paid out at the home closing that include items such as application fees, points, insurance premiums, recording costs, surveyance, and title costs.
6. Utilities
If you’re moving to a larger space, your utilities will likely be higher. Remember to include these common expenses in your budget: electricity, gas, water, sewer, cable/satellite, and internet.
7. Home Maintenance
Home maintenance isn’t something to shrug off as an afterthought. It is easy to accrue high maintenance expenses, especially since you’ll probably need to hire professionals sometimes. Having ample savings on hand is essential for fixing things that need repair as well as for proactive upkeep of your home. Some areas and items of the home that you must maintain include: driveway, lawn and garden, tree trimming, gutters, HVAC, deck/patio, pool, and major appliances.
Real Estate Term of the Week
Private Mortgage Insurance (PMI): PMI is usually required with a conventional loan when making a down payment of less than 20% of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20% of the value of your home, PMI is also usually required.