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Are you thinking about taking the plunge into homeownership for the first time? Becoming a homeowner can be an excellent decision for many Americans. Not only does owning a home have several advantages over renting, but it can also be a great way to build wealth over time.
In many housing markets around the U.S., real estate agents tell prospective buyers that owning a home is cheaper than renting a comparable property. And, that’s often true, in terms of your mortgage payment versus the amount you would otherwise pay for rent. However, the mortgage payment is just one of expense that you need to know, and there can be other hidden costs. With that in mind, here are 10 potential one-time and ongoing costs of owning a home that you need to be prepared for before you start shopping.
We’ll start with the most obvious expense. When you buy your first home, you’ll probably need to obtain a loan from a mortgage lender to make the purchase. So, unless you buy your home in cash, you’ll have to make a mortgage payment each month. Part of that payment will go toward your principal balance and part will be used to pay insurance to your lender.
Each year, you’ll have to pay property taxes on your home. Property taxes can vary widely depending on where your home is located. The average property tax on a $250,000 home ranges from a low of $675 in Hawaii to a high of $6,000 in New Jersey. If you have a mortgage, your property taxes are generally paid in monthly installments to your lender. The lender will put the funds in escrow and pay your entire property tax bill on your behalf before it is due.
If you have a mortgage on your home, you’ll probably be required to maintain a homeowners insurance policy. It’s a smart idea to maintain insurance, even if you buy your home outright. Homeowners insurance can cover you in the event of catastrophic events such as fires. This expense is also generally paid on a monthly basis. In fact, the often-required combination of principal, interest, taxes, and insurance is commonly referred to as PITI.
It’s important to mention that there are some things that basic homeowners policies don’t cover, such as floods. If you’re in a flood-prone area, you may be required by your lender to obtain a separate flood insurance policy, and in some hurricane-prone areas, windstorm insurance is also a separate policy. Check with a local insurance agent for your required (and optional) types of homeowners insurance if you want an idea of what to expect in your local real estate market.
Calculate your monthly costs of owning a home including property taxes, insurance, and HOA fees using our mortgage calculator.
If you put less than 20% down when you obtain a mortgage, your lender will most likely require you to obtain private mortgage insurance, which will also be added to your monthly mortgage payment. FHA loans have their own type of mortgage insurance, while conventional and other types of mortgage borrowers can obtain private mortgage insurance, or PMI. This expense can vary considerably depending on the type of mortgage and how much money you’re putting down. You can request to cancel your mortgage insurance after you pay down the loan to a loan-to-value (LTV) ratio of 80%.
I already mentioned that property taxes, homeowners insurance, and mortgage insurance are generally added to your mortgage payment and deposited into an escrow account. Well, your escrow account doesn’t just start from zero -- you'll most likely be required to make an initial deposit at closing. This will give your account some reserves, in case your property taxes or insurance bills end up being higher than the lender’s initial estimate.
Mortgage points are an optional expense you could choose to pay when you obtain your mortgage. You can pay “points” on your mortgage, which is an up-front expense, in exchange for a lower interest rate over the term of the loan. One point is equal to 1% of your loan’s initial principal balance, and this expense can be worth paying in many cases -- particularly if you plan to be in the home for many years and the long-term interest savings outweigh the cost of paying points.
Closing costs are another expense that can vary tremendously based on your home, location, and several other variables. Generally, closing costs run from 1% to 3% of the home’s purchase price but can be significantly higher, especially when it comes to low-priced homes.
In addition to some of the other expenses mentioned (points, prepaids), common closing costs include your lender’s fees for origination, processing, and underwriting the loan, appraisal costs, title insurance, deed recording fees, document prep fees, and credit report fees, just to name a few.
Most people who have an apartment paying monthly rent are used to paying certain utilities, particularly electricity, cable, and internet. When you buy a home, however, you have a monthly cost for some utilities that you aren’t used to paying. Water is often included with rental properties, as are sewer and garbage collection expenses. Be sure to budget for these when you’re shopping for a home.
If your new home is in a neighborhood (or if you're moving into a condo or townhouse), there’s a good chance that you’ll have to pay some sort of homeowners association (or HOA) fee. These can vary dramatically based on your location and the services the HOA dues cover.
For example, my monthly expense for HOA fees $30 per ($380 annually), which is on the low end and covers common area maintenance, a community pool, and a few other things. However, it’s not uncommon for HOA dues to be much more, especially for condos and single-family homes where it covers things like building insurance, cable, yard maintenance, or other such expenses.
Here’s the biggest wild card expense you need to prepare for. Your home will need maintenance over time, and if you’ve been a renter, maintenance has probably been your landlord’s responsibility. Home maintenance expenses can range from minor costs like replacing your air filters to major costs like replacing your roof.
As a general rule, it’s a good estimate to expect maintenance expenses to be about 1% of your home’s value per year (so, $2,000 on a $200,000 home). This can vary significantly from year-to-year and can be much greater for older homes.
Here’s the point. When first-time buyers are shopping for a home, they often have unrealistically high expectations of how much they can afford to spend. One big reason for this is that they aren’t aware of all of these expenses. I can tell that I would have liked to have read a list like this before my wife and I bought our first home years ago.
The bottom line is that by having a realistic idea of how much you’ll have to pay for your home and its associated expenses, you can avoid getting in over your head with housing costs that are too high before it’s too late.
If you want to uncover more about the best mortgage lenders for low rates and fees, our experts have created a shortlist of the top mortgage companies. Some of our experts have even used these lenders themselves to cut their costs.
The primary costs of owning a home can be bucketed into two categories: one-time costs and ongoing costs. One-time costs include items such as a down payment, closing costs, escrow prepaids, and mortgage points you may pay to a lender to secure a lower interest rate. Ongoing costs include your monthly mortgage payment, property taxes, homeowners insurances, utilities, and maintenance costs.
For most people, yes. Many new homeowners will discover problems with their house that require upkeep. Issues with HVAC systems, electrical, and plumbing can quickly add up. While these expenses are typically part of annual maintenance costs, they can be a surprisingly high for some homeowners. There is also the issue of lifestyle creep, particularly for people moving from a rental to a bigger space. A bigger home means more space to fill with furniture and other items. This is an overlooked expense for many homeowners.
The first step is to list out all of the one-time costs of buying a home. Your real estate agent can help estimate these expenses with you and your mortgage lender will provide a loan estimate with all costs outlined before disbursing your loan. The second step will be to list out all of the ongoing costs, such as your mortgage payment, maintenance costs, and insurances. A good rule-of-thumb is to add a buffer on top of this monthly total, since many people tend to underestimate the true costs of homeownership.
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