What are the expenses associated with buying a home?
If you’re asking this question, you’re doing something right. When I bought my first condo in 2013, I pulled $10,000 out of my Traditional IRA to help make my down payment, because I hadn’t done a particularly good job saving. I then drastically underestimated the amount of repairs I’d have to make on a home that was originally constructed in 1898, though it was renovated and converted to a condo in 2003. I also drastically underestimated my moving costs, insurance costs, utilities, and pretty much every other part of actually owning the home. Unfortunately, your costs when you buy a home aren’t limited to principal and interest – there’s a whole bunch of other costs you need to budget for when you buy a place and have to move.
Let’s start first with the up-front costs that you’re going to have:
- Closing Costs – If you’re taking out a mortgage, you’re going to have to pay closing costs on that mortgage. These can vary based on the specific purchase, but budget between 3 to 5 percent of the purchase price of your home for closing costs. This means if you’re buying a property for $200,000, expect to need $6,000 to $10,000 at closing, above and beyond your down payment. What exactly are closing costs? Gee, now we get to make a list inside of a list:
- Title Insurance – This helps protect you in the event someone challenges whether or not you actually own the home.
- Homeowners Insurance – Most lenders require you to pay your first year’s premium at closing.
- Property Taxes – Usually, any property taxes due within the next 60 days are required to be escrowed immediately and included in your closing costs.
- Prepaid Interest – Your mortgage interest begins accruing the moment you close on your home, but you don’t make your first payment until later in the month. Because of this, the interest accrued prior to that payment typically ends up in your closing costs.
- Attorney’s Fees – If you had a lawyer review the closing documents, this is rolled into the closing costs.
Underwriting Fees – This is the money you pay to your lender for the underwriting process by which they determine whether they want to loan money to you in the first place.
- Recording Fees – Someone has to record the transfer taking place at the Registry of Deeds. You have to pay for that someone to do it.
- Loan Points – If you bought any points from the lender to reduce the interest rate, these are paid up front.
There can be other fees assessed at closing depending on the specific property you are buying, but the ones above are the most common.
- Mortgage Process Costs – Before you even get to closing, you likely have a number of fees you need to pay to begin with. These can include an appraisal of the property, home inspection, attorney’s fees for a purchase-and-sale agreement, and other fees prior to closing.
- Moving Costs – Moving yourself and have a great big pickup truck? Lucky you. But if you don’t have friends to help and if you have too much stuff and maybe a couple young children who are something you have to carry rather than someone who can help, you’ll likely need movers. Moving costs are a huge piece to consider, especially if it is a long-distance move.
- Storage Costs – If the time of your purchase doesn’t quite match up with the time you are exiting your current home, you may need to account for storage costs, as you may need to rent a storage unit for a month or two in order to make sure you have space for all of your stuff. One solution is to get rid of some of your stuff. If you don’t want to do that and have this kind of issue, then storage is something you need to budget for.
- New Stuff – We know, you claim you’re going to move in and just use the stuff you have. But then you realize that your new home has an extra room and you need a new couch for it. And you really hate the dishwasher after using it for a month and you want to get a new one because your plates don’t fit right for some reason. So budget for a few new things, even though your better impulses are going to tell you not to spend the money. You still may end up buying a few things you don’t expect.
Whew! That’s a whole lot of stuff you have to budget for. And it gets better!
Remember that those are just the up-front things that you need to worry about. Yes, the joys of home ownership don’t stop once you close. Here are the things you need to account for once you move in:
- Utilities – Maybe they were rolled into the rent at your old place. But now you’re on the hook for water, electricity, and heat. These costs vary a ton based on the size of your home, the state you live in, whether you have a yard and the size of it, as well as your own usage. It doesn’t do you any good to buy a place where you can afford your mortgage, but you forget to budget to keep the lights on. In today’s world, don’t forget to include cable and internet in this number, too.
- Maintenance – Yes, your homeowners insurance policy is good for covering things like lightning strikes, wind damage, and hailstones coming through your windows. No, it’s not going to cover your dishwasher when it dies. It’s not going to cover the fact that your six-year-old decided to turn the dining room wall into their own woodshop for the afternoon. Repairs happen and you are on the hook for most of them. Not everything in your house is going to break every month, but there are enough different things that can go wrong that invariably, something is going to break every month. It may be a small thing that can be fixed for $20, or the 15-year-old fridge may finally die and leave you with a $600 bill. But you have to budget for things breaking or being wrecked by family members, like the mailbox that keeps getting driven over.
- Homeowners Insurance – Yup, you paid your first year up front. But you now have to pay it every year, otherwise you’re left unprotected against large-scale damage caused by weather, and your mortgage company probably requires it, too. Get used to paying it.
- Property Taxes – They usually go up most years. Most mortgage companies escrow your property taxes each month, that way you don’t have to save the money to pay them on your own. But some do give you the option to not escrow them, and if you take this option, make sure you save to pay your property taxes. If you don’t pay your property taxes, eventually your town could place a lien on the property, which typically has priority over other liens, like mortgages. This is why most mortgages servicers make you escrow your property taxes.
- Yard Care – Beyond what goes on inside the walls of your new home, if you happen to buy a home with a yard, you have all kinds of expenses associated with that care. Watering the lawn, trimming the hedges, taking down trees – these are things you can do yourself or things you can pay someone to do. Either way, you have to account for them getting done.
- Pests – We’ve had mice. We’ve had flying squirrels. We’ve had ants. We’ll probably be able to start a zoo with all the creatures that end up coming into our house eventually. And I don’t blame them for coming in. I like our house, so why wouldn’t they? But pests and homes don’t mix, as they can cause significant damage over time. When it comes to this one, you’re either buying traps and poisons, or you’re calling the exterminator. Neither one is free.
- Renovations – If you stay in your house long enough, you will get to the point where something needs a major change from before. And with big things, like remodeling bathrooms or bedrooms or kitchens, you are going to need to save up for those projects over time, or take out a home equity loan and then pay it off over time. But these are major expenses that you have to factor in, whether you’re planning to do them up front or not.
So those are the biggest items you need to account for when buying a home beyond just your mortgage rate and your basic monthly payment. You may find that you don’t need to account for all of them immediately, but failing to build these into your budget will find you squeezed into more home than you can afford, and that’s not a fun situation for anyone involved.