Declining mortgage rates have sparked interest in homeownership and property purchases, especially by young adults who can’t stand increasing rental charges. Buying a home also comes with the benefit of having equity. However, most first-time homeowners are shocked by the entire purchase process. While the monthly mortgage costs are not surprising, unexpected costs that come with homeownership can dent your bank account.
Before you receive the keys to your new home, you should understand various expected and hidden costs of buying a home. Knowing these costs can help you budget before initiating the buying process. Below are the hidden costs of buying a home.
1. Property Taxes
Property taxes are among the many hidden costs you should expect when buying a home. Ideally, these are taxes paid to local or county authorities. Different states have varying property taxes, and the amount payable depends on your property value. Most states require property taxes to be paid alongside monthly mortgage payments.
Local and county governments use the funds collected from property taxes to improve infrastructures, such as public schools and employee salaries. Recent statistics show Hawaii has the least property taxes at 0.30% of property fair market value, while New Jersey has the highest at 2.13%.
The last thing every new homeowner wants is to move into a house that requires costly repairs. Costly repairs are the true hidden costs that you should avoid. The only way to avoid this risk is to pay for a home inspection after the seller accepts your offer. You should choose a professional home inspector who can identify serious structural problems and other hidden issues.
If the inspector finds structural, mechanical, and other issues in the property, you should renegotiate with the property seller, who should cover the repair costs. Home inspection costs range from $300 to $500, depending on property location.
3. Private Mortgage Insurance
Private mortgage insurance is the amount homeowners pay to qualify for a mortgage without the 20% down payment during the purchase. For instance, if your mortgage lender agrees to cover 3% down, PMI rates start immediately after you close the purchase deal. Mortgage lenders strive to profit from home mortgages without losses.
Loses can occur if property prices dive and borrowers stop paying their monthly mortgage. As such, they impose security interests on the property. PMI rates range from 0.05 to 1% of the loan taken annually.
4. Closing Costs
Closing costs are an umbrella term that includes several fees paid during the purchase process. While new homeowners expect these costs, most don’t know the actual figures. Closing costs include prepaid homeowners’ association fees, attorney fees, mortgage origination fees, recording fees, title insurance, notary, and survey fees.
Like other costs mentioned, closing costs vary among lenders and real estate markets. Generally, you should expect to part with 2 to 5% of your property value as closing costs. Typically, closing costs should be paid when the deal is closed. However, you can roll them into a loan.
5. Moving Costs
Moving expenses are another often overlooked cost by new homeowners. After you’ve received the keys to your new home, the next step is moving belongings from your old home. While most homeowners anticipate the move, the cost of hiring moving companies is surprising and can turn costly, especially after spending on the house.
6. HOA Fees
If your property is a townhome, condo, or in an enclosed neighborhood, you should pay monthly fees to the relevant homeowners’ association (HOA). Properties in such neighborhoods share several amenities, including entryways, backyards, gardens, roof decks, swimming pools, tennis courts, and laundry services.
HOA fees vary based on your neighborhood and the type of home. However, properties with more luxurious amenities have higher HOA fees. These fees are used to maintain shared areas, conduct repairs, and do landscaping.
7. Homeowners’ Insurance
If you rely on a mortgage to purchase your home, most lenders require homeowners’ insurance to approve the mortgage application. You should also consider it even if you buy the house for cash. Like other insurance policies, it insures your property structure and belongings from destructive events, such as fires.
While at it, you should inquire from your insurance agent what the policy doesn’t cover. For instance, most homeowners’ insurance doesn’t cover damage caused by earthquakes, floods, and vandalism. You should consider taking additional policies to protect your home, especially if you live in flood and earthquake-prone areas.
Your new home should have basic amenities like running water, electricity, gas connections, cable TV, and internet. Unfortunately, most new homeowners forget these costs when budgeting for property purchases. You should budget for these utilities and pay deposits before moving. Remember that some providers require large deposits for homeowners with poor credit.
The Bottom Line
Buying a new home is certainly exciting. However, it comes with a lot of costs to incur. Apart from the cost of buying the house, you should familiarize yourself with other hidden or less-than-obvious costs that can take you by surprise, especially with the perilous financial position you could be after paying for the house.