The most expensive purchase you will make in your entire life is buying a house. Closing costs, which can be anywhere from 2% to 5% on top of the purchase price of the house, can also add to the total cost. This is just the beginning.
Routine maintenance, annual property taxes, and increases in homeowners insurance premiums can quickly add to the cost of your housing budget once you have purchased the house. Continue reading to find out more about the costs associated with homeownership that every first-time buyer should be aware of.
What are the common costs of buying a house?
Although there may be some surprises, such as the need to raise extra funds to cover the difference between the appraised value of the sale price and the actual selling price, buying a house involves predictable costs.
The cost of your transaction will vary depending on the amount you pay, the interest rate you have on your mortgage, the local market rates, such as appraisals and inspections, and how valuable the home is.
The amount of cash that you have, the price of the home, and the type of loan you take will all affect the amount of your down payment.
Conventional loans are available with as little as 3% down through Fannie Mae HomeReady or Freddie Mac Home Possible programs.
You don’t need to pay anything down on USDA loans or VA loans. FHA loans require that you put down at least 3.5% if you have a credit score of 580 or more, and 10% if it is below 500.
Although closing costs vary from one seller to another, you might be able to get the seller to cover all or part of them.
Common closing costs include fees to your mortgage lender (like an initial fee), mortgage discount points, appraisal fees, and title fees.
What are the predictable costs of homeownership?
You can budget for the regular costs of homeownership. These are the expenses you need to consider when planning your monthly home budget.
The four components of your mortgage payment are principal, interest, and taxes, as well as insurance or PITI. Most lenders will require that you have an escrow account (also known as an impound account) to pay these expenses. This is typically where your taxes and insurance payments go.
If you have a fixed-interest rate mortgage, the principal and interest of your loan will not change. However, taxes and insurance may change. Monthly payments will increase if your property taxes or assessed value of your home rise.
Your monthly insurance payment covers your homeowner’s insurance premiums, private mortgage insurance (PMI), and mortgage insurance premiums (MIPs) if you did not put 20% down.
Homeowners Association (HOA) dues
HOA dues will be required if you live in a community that has a homeowners association. HOA dues are typically higher for complexes or other areas with significant amenities than those in single-family neighborhoods with fewer amenities.
Your dues may be payable monthly, quarterly, or annually. Talk to your agent about the dues that you will be responsible for, and how often they must be paid.
Remember that HOAs may also have rules (sometimes called restrictive covenants), which can be easy to break and could lead to fines. You could face a fine for not having your trash can visible, or parking in an undesignated area. To ensure compliance and avoid being surprised by unexpected fines, make sure to read your HOA rules.
For home maintenance, you’ll need to keep a small amount of money in an emergency fund that you can contribute regularly. A good rule of thumb is to keep 1% of the home’s total cost for maintenance each year. If your home was purchased for $500,000, you should set aside $5,000 each year for maintenance.
Your location and your home will impact how much you pay for utilities. A smaller home with efficient appliances and good insulation will have lower utility bills than one with inefficient HVAC equipment, poor insulation, or old appliances.
Ask the current homeowners what their average utility bills are when you’re looking for a house to buy. Although your actual usage will vary, this can give you an idea of the expected cost of utilities in the home.
Costs for landscaping will vary depending on the climate of your area, your yard, and your preferences. You may have to hire a professional to do your yard work if you are short on time or have physical limitations. This could be costly depending on the area.
You will need to budget for tools and fertilizers, as well as seeds, pest and/or weed control, mulch, plants, and tree care depending on the size of your yard.
What are the unexpected costs of homeownership?
Owning a home is not only about planning for regular expenses. It also means that you need to plan for unexpected costs. These are the costs you should save money for.
Home emergency — Some types of sudden damage may be covered by your homeowner’s insurance, but not all. Your home may be covered by a tree branch falling on it, but not your child hitting a ball through the window. You should verify your insurance coverage. However, you will need to pay a deductible and your insurance company may increase your rate after you file a claim.
Plumbing emergencies — On average, plumbing repairs cost $325, according to Angi. But that assumes you find the problem quickly. If there is a major leak, it could cost thousands to fix. This could cause damage to your floors, drywall, and cabinets, as well as to your belongings.
Heating and air conditioning replacement — According to Carrier, which manufactures both, the average furnace will last between 15 and 20 years. You could end up paying a lot if your furnace needs to be replaced. According to HomeAdvisor, the average cost of replacing an HVAC system is $7,000 It is important to determine the age of your HVAC equipment so you can plan for these costs. In the summer and winter, sudden cooling or heat loss can prove fatal.
How to reduce common homeownership expenses
Shopping around, keeping up with maintenance, and paying your mortgage on time may help you reduce your homeownership expenses. These are some common ways to reduce your homeownership expenses:
Compare all options — You can reduce your monthly mortgage payment by reducing the amount of your purchase budget, looking around for the lowest interest rate, and putting down as much as you can. Comparing homeowners insurance quotes each year can help you keep your monthly payments down.
PMI can be eliminated — PMI can be eliminated once you have 20% equity in your house. By paying off your mortgage, you will have 20% equity in your house. However, equity can be built as your home’s value increases.
Prevent costly repairs by maintaining your property. Vacuuming behind appliances and cleaning their
air intakes can make them last longer.
Do it yourself — While DIY tasks can be very cost-effective, you should ensure that you are doing a great job. Leave the difficult tasks to professionals. Do-it-yourself plumbing and electrical repairs can lead to higher costs in the long term, as well as being dangerous.