Purchasing a home is a wise financial decision, especially if you are planning to stay in one place for a couple of years. Mortgage payments are generally lower than monthly rent costs, which allow homeowners the opportunity to save each month while building equity in their investment. When considering a home purchase, there are more expenses other than just a down payment and a mortgage. Though these are the most expensive, they are not the only home buying expenses.
INSURANCE AND TAXES:
Homeowners Insurance - most lenders require homeowners to require homeowners coverage. You will need to take into account the monthly payment with your mortgage.
Property taxes add another expense that varies depending on your new home’s value and location.
Mortgage lenders often loop taxes into your monthly sum to ensure timely payments. If you provided less than 20 percent down on your home purchase, you may also need to pay private mortgage insurance (PMI) fees.
The thought of spending an incredible amount of money on a home without first having a home inspection performed is not recommended. Home inspections are used to provide an opportunity for a buyer to identify any major issues with a home prior to closing. Your first clue that a home inspection is important is that it can be used as a contingency in your contract with the seller. This contingency provides that if significant defects are revealed by a home inspection, you can back out of your purchase offer free of penalty, within a certain timeframe. The potential problems a home can have must be pretty serious if they could allow you to walk away from such a significant contract.
A professional inspector will look for structural defects, leaks, heating and cooling system, roofing concerns, infestations,mold,water heater, and a host of other things. It is important and I always encourage my new buyers to have one performed, even when purchasing new construction. Just keep in mind, regardless if you buy the home or not, you will not be monetarily reimbursed for the cost of the home inspection.
Lenders want to make sure the home is worth the amount you are trying to borrow so this is an expense you will need to be prepared to pay. The typical cost of an appraisal is between $200 and $500 and are usually completed within a few hours. If the home does not appraise for the agreed upon selling price, either the buyer will need to pay the difference or the seller will need to reduce the home price to compensate for the appraisal/selling price.
These vary based on type of loan, location, and lender used in the transaction. Many of these are lumped into the closing costs so ensure you understand each cost separately to know what you are paying for. You should be prepared for and can expect to pay for items like:
- Escrow/Interest ($1000+) – Property tax/insurance may need to be put into an escrow account upfront. You will also have to pay prorated interest from the closing date to the first day of the next month.
- Lender Origination Fees (between 0.5% to 1.5% of the loan) – The cost of requesting a home loan to include processing the application, the underwriting process, and funding of the loan.
- Loan Application ($100 to $300) – An official credit report and other costs associated with asking for a loan.
- Surveys ($150 to $300) – A home survey is used to determine the property boundaries.
- Title Services ($200 to $400) – A public records title search. Also included here you may find government. notary, and other associated filing fees.
- Other Fees (price depends on the item) – Flood certification, termite bonds, home warranty, security system fees, cleaning, etc. can quickly eat up rainy day funds you have been saving.
It does not matter if you try the Do-It-Yourself approach or not, there will be some costs associated with moving. For those who go the DIY route, expect costs to run at least $100, depending on whether you rent a truck, provide food/beverages for helpers, etc.
If you decide to be moved professionally, the costs can go up significantly higher. An obvious benefit of this approach is you can concentrate on other tasks and let the movers do what you hired them to accomplish. This is definitely an area where shopping around can help keep expenses down to reasonable levels.
Some long-term renters prefer to stay in a lease to avoid the expenses and headaches associated with owning a home. At a professionally managed apartment complex, onsite staff is typically responsible for everything from lawn maintenance to plumbing fixes. For homeowners, particularly those in single-family residences, the responsibility rests entirely on their shoulders. Experts urge homeowners to set aside approximately 1 to 2 percent of their home’s purchase price each year for general upkeep. Based on the median home value in the U.S., that would be about $3,006 annually if you’re saving 1.5 percent.
HOMEOWNERS ASSOCIATION DUES:
If you live in a condominium, townhouse or subdivision, you may be charged a monthly Homeowners Association (HOA) fee. HOA fees vary based on location, inclusions and unit size. For some, HOA dues are beneficial because they minimize personal responsibility for maintenance and enable group-rate prices. Fortunately, your mortgage lender calculates HOA dues into your estimated debt-to-income ratio before approving your home purchase.
Bear in mind the risk of an assessment. Special assessments are one-time fees the HOA board can impose for necessary building repairs. These are more common in older buildings in need of newer materials and technology. You will have to pay your share of the upgrades, which can amount to thousands of dollars.
NEW APPLIANCES AND FURNITURE:
More often than not, these purchase will be discretionary, but there may be instances where a purchase is necessary because of a new addition to the family or perhaps even a move from a small place, or one that was furnished to a larger empty home.
Sometimes homes come with appliances and other times they do not. If you need to purchase a refrigerator, washer/dryer, or other home appliances, the costs can quickly stretch your budget so know what you need before jumping into a home purchase.
One of the most exciting aspects of homeownership is the opportunity to make a space your own, which may involve some minor to major remodeling projects. Whether structurally necessary or completely cosmetic, include these expenses as part of your total home-buying budget if you plan to complete them within the first year of home ownership. If you have the luxury to delay renovations, you can save as you go and work on the home when personal finances allow.
Remodeling projects can be both small or large. Typical changes include:
- Add-ons such as decks, patios, or sheds
- Door locks
- Expanding/redesigning rooms
- New siding
- Room additions
Final thoughts on buying a home:
Buying a home is a major endeavor that comes with substantial advantages. Calculating all costs, even the unanticipated expenses, safeguards your wallet and helps you avoid the most common pitfalls. While we all know there will be expenses, no one wants to be caught off-guard with home buying costs they are not prepared for.
Steve & Tonja Doty
Realty Executives Associates, Knoxville TN