The Hidden Costs of Buying and Owning a Home

The Hidden Costs of Buying and Owning a Home

Buying and owning a home comes with a lot of costs that newby homeowner’s don’t expect. So you and your bank account aren’t blindsided, here’s a list of what you can expect once you have that key in your hand. Make no mistake: owning a home is better than renting, but it may not be as simple as you’d like.

  1. There’s more to monthly payments than you might think.

For credit card payments, your monthly minimum goes towards both principal and interest, but paying off a mortgage is more in depth than paying off a credit card. There are a few other things to keep in mind. In financial talk, those ‘other things’ are referred to as PITI, or your home’s principal, interest, taxes, and insurance.

  • Mortgage Interest: Commonly referred to as simply ‘interest rate’ or ‘apr’ (though the two aren’t technically the same), mortgage interest refers to the rate you pay when you take out a loan.

  • Yearly Property Taxes: Just like you have to pay taxes on a car, you also have to pay taxes on a house. Thankfully, the total is divided by 12 and paid on throughout the year (instead of all at once). Just know that a house’s worth may go up or go down every year, so the amount tacked on to each month may change from one year to the next.

If you’re currently house hunting, most sites like Zillow or Realtor will have the home’s tax history somewhere on the listing. Again, just take the amount and divide it by 12 to see what you should expect to pay month to month.

  • PMI (AKA Private Mortgage Insurance): If you’re not putting 20% down, you’re going to have pay PMI. How much you pay per month depends on the lender and your down payment. Typically, PMI is about half of 1% of the loan amount.  

  • Home Insurance: Homeowners insurance can cost anywhere from $300 a year to $1,000 a year. If the home is pretty standard, the Federal Reserve states you can approximate your monthly premium by dividing the value of your home by 1,000 and multiplying by $3.50. Example: a $300,000 house will likely have a yearly home insurance amount of around $1,050 (or $87.50 monthly).  

2. Inspection

Buyers typically pay for inspections because it’s considered to be a part of his or hers ‘due diligence’ before buying. That said, things can be negotiated. It’s not unheard of for a buyer to request the seller pay for some, if not all, of the inspections. Whether the seller agrees is an entirely different matter! Typically inspections breakdown as follows (but, here again, the buyer may pay for all of it):

  • Home inspection ($300-$500): Buyer paid. Is usually paid for the day of the inspection, but can be included in closing.

  • Termite ($65-$100): Seller paid.

  • Well and Septic ($600-$700): Buyer pays for inspection, but seller pays to have the septic pumped (about $350).

If any issues come up during an inspection, the seller can choose which ones he or she will address. If an agreement is not met, the sale falls through. Also, if the home is an ‘as-is’ property, don’t expect anything other than a possible price drop to happen.

When you make an offer, your realtor will often put in a ‘concession’ amount for you should you not specify, which is the amount the seller will agree make in repairs if any are needed. The norm is $1,000, but it can be both higher and lower.


3. Closing Costs

You pay for a lot of things in closing costs, and explaining all of them is probably more than you’re up for right now (if not, we go into it in depth here). Typically, closing costs include:

  • Appraisal

  • Special Inspections

  • Attorney Fees

  • Title Insurance

  • Property Transfer Taxes

Closing costs can range anywhere from 2-5% of the home’s purchase price. Therefore, if you’re buying a $300,000 home, your closing might be anywhere from $6,000- $15,000.

4. For-sale-by-owner? Buyer pays realtor fees.

Your realtor will make 3% of the purchase price of your new home. For most purchases (that aren’t for sale by owner) the agent for the buyer and the agent for the seller split the 6% commission. If you’ve already signed with a realtor and you choose to buy a for-sale-by-owner home, then you will be the one to pay your agent. Because you’re paying and not the seller, most for-sale-by-owners are ignored by buyers because they don’t have the extra cash to pay their realtor. For good reason. 3% adds up quickly!

Example: A $300,000 house would mean you would have to pay your agent $9,000 at closing.  

5. HOA Fees

Many homes don’t have HOA fees, but just as many do. When deciding whether you can afford a house, make sure to check whether you will have to pay HOA fees!

HOA fees often range from $200-$400 a month, but this depends on the amenities and the location.

6. Utilities

For many home buyers, this goes without saying that you’ll have to pay for utilities once you own your own home. However, if you’re coming from a rental situation where you didn’t have to pay for things like water or trash, then you may have forgotten about certain monthly bills that homeowners have to pay. These include:

  • Electricity

  • Water

  • Trash

  • Internet

  • Phone

  • Cable

Use the size of the house and your family to help you determine what you’ll likely pay for utilities every four weeks. Overestimate a little bit and add up everything to your expected monthly mortgage to figure out just how much your home will cost you every month.

Note: when calculating power usage, you’ll need to know what type of heating and cooling the home has.

7. Yearly maintenance

If you’re buying the home for you and your family, financial experts suggest you put away 1% of your home’s value each year to cover needed maintenance (if it’s a rental property, then 3%). This is obviously up to you to do or not do, but overall houses require maintenance each year regardless of how new they are.

Whether it’s chimney flashing, cedar siding, or crawl space plumbing, something in your home is going to need a little TLC throughout the year, and homeowners spend about 1% of their home’s value on TLC. We recommend you put a little bit aside each month so you don’t have to pull out a credit card if and when something happens.    

Don’t worry, it’s worth it.

When you own your own home, you’re not giving your money to a landlord, but instead are in a way you’re giving it yourself. With each payment you make you build a little bit of equity in your home, and the longer you stay there the higher your home’s value is likely to rise. Homes are investments that, more often than not, pay off. You’re likely to get a much better return in your home than you ever would in any stock; you just have to accept they’re not as simple to own as you might like.

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How to Reduce Closing Costs