Be Aware and Prevent Unexpected Costs
After years of saving, you are finally ready to buy a house -- but have you really saved enough to buy the house that you want? There are more expenses to consider than just the price of the home, and first-time home-buyers can be caught by surprise at the number and size of the auxiliary expenses. Don't let this happen to you. Review this checklist to make sure you understand the total costs before you decide on the size of home to buy.
- Down Payment - A standard down payment is 20% of the purchase price, but other offers may be available depending on your credit status and eligibility for programs. A lower down payment is not always desirable -- keep in mind that a lower down payment equates to greater interest costs over the course of the loan. You always have the option of scaling to a smaller home so you can afford to pay 20% down.
- Private Mortgage Insurance (PMI) - PMI is another side effect of a low down payment or other risky loan terms. Generally, with a lower down payment, PMI will be required by the lender to accommodate the higher risk. PMI is often included in the monthly mortgage payments, but could be included as an up-front charge depending on the level of risk you pose.
- Homeowner's Insurance - You will need proof of homeowner's insurance and typically have deposited money for the first few payments before your home purchase can be completed. Aside from just being a smart idea, insurance is required by the bank to show you intend to take care of the home and are thus a good bet to repay the loan.
- Taxes - Check the property tax rate for the new home. Local rates vary significantly depending on school and fire district levies. You may owe the previous homeowner for some portion of fees already paid. Also, consider other specific neighborhood fees such as homeowner's association fees and maintenance fees for neighborhood amenities like pools and landscaping.
- Earnest Money - Earnest money is placed in escrow along with an offer to show serious intent to purchase the home. Typically, it is a few percent of the cost of the home. While this is not a separate expense -- it will be applied to a down payment or closing costs and you will get it back if the sale doesn't go through -- it is important to remember this expense for cash flow purposes.
- Maintenance Costs - First-time homeowners often forget how all the little things add up with home maintenance, especially at the beginning when you may need to purchase things like lawn care equipment and household tools. You can easily spend 1-2% of your home's purchase price in the first year.
- Appliances/Furnishings - Milk crates and a mattress on the floor were fine in the early days, but now you have a home that you need to fill with furnishings and possibly new appliances. Starter homes often have older appliances and dated décor that need replacement. It is easy to underestimate the costs without making a list and pricing individual items or projects. You may be shocked at the final number.
- Closing Costs - A bewildering variety of fees show up at or near closing, including appraisal fees, survey costs, title insurance, home inspection, attorney's fees, recording fees, and any points (an upfront payment that lowers your interest rate). Fortunately, the Consumer Finance Protection Bureau (CFPB) has mandated that closing documents more clearly outline the individual costs. An online example may be found at the CFPB website.
- Moving Expenses - Depending on how far you are moving and how much stuff you have to move, moving expenses can be significant. Any time you have to hire professionals you need to carve out room in the budget, and you will probably have to buy at least your friends' snacks and meals if you are moving on the cheap.
- Monthly Bills - Do not forget about the monthly bills of electricity, gas, water, and any fixed telephone or cable TV/Internet connections. There are likely to be setup installation charges that can cause temporary cash flow problems.
- It may seem overwhelming, but there are plenty of resources available to you as a new homeowner, both online and in person. Take advantage of these resources, plan your purchase, and familiarize yourself with the typical costs, and you can enjoy a smooth transition into home ownership -- at least as smooth of a transition as possible.
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