3 Things to Know Before Shopping for Your First Home

While there are many good reasons to buy a home, it's important to get a real sense of the costs involved.

Jan 25, 2014 at 1:00PM


Source: Picasa.

First-time homebuyers are yet to really come back to the market as much as they were before the financial crisis. In fact, only 38% of sales this year were to first-timers, down by 1% from last year, and below the long-term average. As the market continues to improve, younger buyers' confidence in the housing market will grow, and we'll see this percentage climb over the next few years. 

However, when looking at some of the mortgage calculators and home affordability calculators available online, some of the numbers can be deceiving. There is much more of a cost involved with owning your home than simply paying your interest and principal each month. Before you begin the home buying process for the first time, there are some costs you need to consider.


Source: LendingMemo.

Property taxes
If you have a mortgage, you will most likely need to pay a portion of your annual property taxes into an escrow account each month. These taxes can range from the mild to the obscene.

For example, the average $250,000 home in South Carolina pays property taxes of around $1,600. In New Jersey, the figure jumps to $6,400. In terms of a monthly payment, it is the difference between $133 and $533 tacked onto your monthly bill.

Another thing to keep in mind is if there is a possibility of renting out the home down the road. Let's say you buy a two-bedroom "starter home" with the goal of upgrading in a few years and keeping the small house as a rental property. In many locations, property taxes on rental properties and second homes can be significantly more than for a primary residence.

For instance, one such "starter home" that would sell for around $100,000 that is owner-occupied in my town pays $931 annually in property taxes, according to the county assessor's website. The tenant-occupied home just three doors down with the same floor plan pays $3,334.


In many places across the country, regular homeowner's insurance is sufficient, and will normally run you about $875 per year on a $250,000 home. It will also cover a certain amount of contents inside the home, say $100,000 worth. However, depending on where you live, there may be more to the story.

If you live in a hurricane-prone area, like much of Florida, your mortgage services might require windstorm insurance, which covers things like your roof blowing off in a storm, or an airborne tree branch flying through your window. Windstorm damages are extremely hard to predict, and therefore very few companies offer the insurance. $250,000 in windstorm coverage will cost around $3,000 annually, and could be more or less depending on how windstorm-resistant your home is.

Although hurricanes have been known to cause flooding, a windstorm policy doesn't cover flood damage. Much of the coastal areas in the U.S. are in "flood zones," and flood insurance will be required. Private companies are beginning to offer flood insurance, and $250,000 in coverage will run you from between $2,613 and $9,177 annually, depending on how flood-prone your area is.

Recurring expenses
In addition to predictable expenses like taxes and insurance, there are many other costs involved with owning a home that renters sometimes don't think about. Roofs need to be replaced every so often, as do air conditioners, appliances, flooring, and pretty much everything else in a house. 

How much house can you afford?
If you plug a mortgage loan for $200,000 into a mortgage calculator ($250,000 house with 20% down), it will tell you the monthly payment will be $1,000.34 at the current interest rates (4.39% as of this writing). However, when figuring out your true payment, you need to calculate the fixed costs above and factor them in.

If you live in a flood-prone area, your monthly payment could shoot up to $1,900 or more, depending on taxes and the condition of the home. A high property tax rate in an inland area could mean a payment of over $1,600, and that's assuming no flood or windstorm risk. 

When calculating how much house you can afford, it's very important to take all of these factors into account. While homeownership definitely has many benefits, it's important to get a realistic sense of how much your house is really going to cost.

More ways to boost your finances
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers