Almost anyone who’s ever thought of owning their home knows you’ll need to save up some money for a home loan down payment. The exact amount needed varies depending on your loan qualifications, from the minimum 3% to the traditional 20%. And yet, rarely do potential first-time homebuyers realize that buying a house means paying more than a monthly mortgage. Consider these five extra costs before taking the plunge.
Closing costs
One of the first surprises first-time homebuyers might encounter are the closing costs for taking out a home mortgage loan. Closing costs cover many categories, including title and registration fees, attorney costs, lender origination fees and more. Some loans may offer lower lender fees in exchange for higher interest rates, and you may be able to shop around for cheaper title companies and lawyers in your area.
But don’t be surprised if your closing costs add $10,000 – $30,000 to your initial payment, all of which you’ll have to pay upon closing (i.e. when you sign all your loan papers and receive your keys). According to Rocket Mortgage, closing costs typically amount to 3% – 6% of a home’s purchase price. So, you may have saved what you thought was 10% of your desired home price, but unless you have more socked away to cover your closing costs, your savings may actually turn out to be more like a 5% down payment.
In other words, say you saved up $40,000. You originally assumed this would cover a 10% down payment for a $400,000 home. But if you’re paying $12,000, or 3% in closing costs, you really only have a 7% down payment.
A smaller down payment may not realistically affect your loan rates or terms, but it’s important to note that closing costs are fees you’re paying that are not returned to you. The more you pay in closing costs, the less you might have for your down payment and the less you’ll be putting towards your home’s equity.
Maintenance and repair costs
Every home requires upkeep, so responsible buyers should budget for the inevitable maintenance and repair costs for their home. In fact, according to insurance company Hippo, more than 80% of homeowners are hit with a substantial repair within the first year of ownership. More than half of those owners reported paying between $1,000 – $5,000 for that first fix.
As a result, most respectable real estate agents and lenders will recommend saving roughly 1-3% of your home’s price every year just for maintenance and repair. These costs cover plumbing issues, heating and electric maintenance, simple threshold weatherseal replacements and more. Of course, if your house is in good repair, you may not need to spend so much every year, but only 5% of homeowners surveyed by Hippo reported having no unexpected repairs in the first year.
To put that in perspective, if you buy an average $400,000 house, that means you should expect to spend $4,000 every year on maintenance.
You can certainly learn how to DIY many fixes – saving yourself money instead of calling the plumber at midnight on a Friday for your stopped up-toilet – but certain issues require expert repair, like electrical or roofing problems. Instead, make sure you have enough on hand to perform routine maintenance and prevent future pricey interventions.
Increase in annual property taxes
Another surprise cost that many first-time homebuyers may not take into account is the annual increase in property taxes. If you, like the majority of homeowners, have an escrow account managed by your mortgage servicer, your monthly payment can rise every year as your property taxes and home insurance premiums go up.
Even if the principal and interest payment for your mortgage remain the same, escrow amounts are assessed annually to adjust for changes in your property taxes and insurance costs.
Rarely does anyone tell you that, when you first move into a home, your property taxes will be automatically reassessed, resulting in a larger-than-average jump in taxes for that property. Property taxes are assessed annually and you may be able to lower your taxes if you ask for a reevaluation through your local tax office. However, it can take a couple years for those “new owner” tax assessments to stabilize, resulting in escrow shortages that may be covered by an increase in your monthly home payments.
Insurance deductibles
Another unexpected cost to consider is your home insurance deductible. Every home should have home insurance that adequately covers the cost to rebuild in the unlikely event of a total loss. You should also make sure that your valuables are covered in case of theft, fire or natural disaster, and if you live in a flood zone, consider adding the proper additional coverage.
Should you need to file a claim with your home insurance company, though, you’ll need to pay your deductible first. Home insurance deductibles work just like car insurance or medical deductibles: first you pay your portion of the costs (the deductible) and the insurance company pays the remainder up to your limit.
Home insurance deductibles usually range from $500 – $2,000, and smart homeowners should ensure they have that amount saved in case they need it. You can easily and quickly shop for affordable home insurance at places like Lemonade and Hippo. Other companies like Liberty Mutual, Geico, Progressive and Allstate may offer insurance that fits your needs, and you may qualify for a discount if you bundle your home and auto insurance through the same company.
Increase in association dues
Lastly, first-time homebuyers shouldn’t count on homeowner association (HOA) dues staying the same. Condominium and homeowner associations levy fees in order to pay for upgrades and repairs to community property and amenities, and those costs often increase as time wears on. Gardens, private roads, roofs and things like trash removal all cost extra to maintain. Even more unexpectedly, your association may exact special assessment fees to cover the cost of an emergency repair like a costly stair redo or if there was widespread flood or storm damage to the property area.
Thomas Skiba, chief executive officer of Community Associations Institute (CAI), said that “operating costs are going to rise with inflation, an annual average of 3% or 4% more, so it’s reasonable to expect a regular increase in your HOA fees.”
If a community hasn’t raised dues in the past several years, you might ask yourself what maintenance issue has been deferred. Plan ahead and make sure you can afford those potential increases before you bid on that house.
Bottom line
Buying a new home is an exciting time, but smart shoppers should take into account all the potential costs before putting in their offer. Buying a house that’s within your means is smart spending and helps to ensure your long-term financial security. Make sure you save more than your down payment to cover your closing costs, maintenance and repair costs, as well as your insurance deductible. Take into account an expected increase in property taxes and homeowner association dues when calculating your monthly budget. If you can comfortably afford all that, then you’re starting your dream of homeownership in a solid place.
