The Hidden Costs of Buying A Home
So you want to buy your first home. You’ve created your budget, gotten pre-approved, and maybe you’ve even started looking at houses.
But have you accounted for everything? If you are a first time home buyer, there might be extra fees, costs and taxes you aren’t aware of. Some of these costs might be small and inconsequential, but others could have a damaging effect if you aren’t prepared for them.
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Closing costs are a pretty commonly used term when it comes to buying a home. People ask about closing costs, they’re talked about in the media, but what makes them up exactly, and how much can you expect them to actually…cost?
In a sense, closing costs are the different fees and payments associated with everybody who was involved in the home buying process. This includes things like paying the attorneys who looked over the contracts, appraisals, home inspections, paying an escrow company, taxes, and typically a first payment on different insurances needed.
Closing costs vary from state to state, but they typically cost about two to five percent of the total worth of the mortgage loan. That means if you get a $100,000 mortgage loan, you can expect an additional $2,000 to $5,000 in closing costs.
Home Owner Insurance
It’s a common practice when getting a mortgage loan to have to get homeowner’s insurance. The lender often requires it, and you have to pay for it. The total cost depends on the amount of coverage the lender requires, and what you want, but expect to have it be a normal, yearly expense.
The reason lenders require home insurance is because a mortgage is a secured loan, with the home being the “security.” The lender is simply trying to protect their interests, and what the loan is based off of.
Paying for your first year of home insurance is typically a part of your closing costs, but after that it will be a separate cost. Home insurance costs vary between states and coverage, but the national average is about $1000 a year.
Private Mortgage Insurance
Another common fee first time home buyers encounter is having to get private mortgage insurance (PMI). If you have limited credit or are unable to put down a 20 percent down payment on your home, many lenders require the purchase and upkeep of private mortgage insurance. Homeowners have to keep PMI until they finally reach that 20 percent of the loan paid.
PMI covers the lender of a loan, not the homebuyer. Basically, it’s an insurance policy against you defaulting on the loan. Often, PMI is grouped as part of your monthly mortgage payments, but could also be done in a lump yearly sum. Typically, PMI costs .5 to 1 percent of the total mortgage on a yearly basis. So, if you have a $100,000 mortgage, a PMI can cost about $500 to $1000 a year, or $41 to $83 extra a month.
PMI isn’t a permanent fixture in a mortgage. Eventually, you will hit the point that your payments have covered 20% of the total loan, or what is typically required of a down payment. At that point, many lenders will drop the need for PMI, or allow you to refinance the loan and remove it.
Furnishing and Appliances
So you have a house, but what is going to fill it? It’s possible you’ll have some furnishings from before you buy a house, but it’s likely you’ll need or want to buy more. These costs can quickly deplete a new homeowner’s already hurting bank account, but many deem it a necessary purchase. You’ve got the perfect house, now you need to fill the walls and the empty spaces. It is possible to furnish a home for cheap, but you’ll still be spending money.
It’s also likely you’ll need to purchase expensive appliances too. Many (especially new) homes, don’t have necessary appliances like fridges, ovens, microwaves, washer and dryer and more. This cost only arises if these aren’t included in a home, but if they aren’t there, expect to spend a few thousand dollars. Other times, even when they are included with the home, you may want or need to replace them because they are out of style or no longer operating effectively.
Once you get the home, it is up to you to care for, maintain and improve it. There is no more landlord to call when something breaks; it falls to you.
If you bought an older home, you can expect that more money will be required for general maintenance. This can include larger repairs like replacing a roof or repainting, to small but constant repairs like a broken sprinkler line. Even if you have a new home, things will still eventually break and need to be addressed.
At that point, you have two choices when something breaks. Either you fix it yourself, or you have to pay for somebody else to fix it. Either way, money will be spent fixing and replacing things, it just depends how much more you want (or need) to spend for a professional.
Now that you know about the hidden fees of buying a home, you can be better prepared to manage them. Hidden costs like these are what makes it important to get a loan lower than what you are pre-approved for, as the lenders don’t take these expenses into account. That might mean saving a little bit more for the one time purchases, or including recurring ones in your budget. That way, you won’t have any nasty surprises because you’ll be prepared for them. Ultimately you’ll (hopefully) be less stressed during the home buying process.
Image source: https://pixabay.com/
Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated July 11, 2017. It was originally published July 7, 2017.