When buying a home it is easy to get caught up in the moment. Envisioning what you are going to do with the property can cause you to lose sight of additional costs and often the budget creeps higher and higher. What easily gets forgotten is that the down payment is not the only expense to consider when purchasing a home. Kiplinger’s Andrea Browne highlights five expenses to keep in mind if you want to prevent your homeowner dream from becoming a nightmare.
Before making an offer on any property, it is always recommended to have a home inspection done. Costing usually a minimum of $200, the fee is typically non-refundable and can add up over time if you're considering multiple properties. It can be worthwhile to ask around for various bids on the inspection; however, it is not always worth going after the cheapest inspector. A well-respected home inspector can cost you more up front but may save you considerably more down the road.
Before approving your mortgage, the lender will want to make sure that the property is in good condition before letting you borrow against it. They will hire an independent appraiser to review the property and compare it to the surrounding sales of other properties. Appraisal fees are usually in the $250 to $600 range and often little can be done to negotiate them down.
Some lenders require you to set up an escrow account, especially if you put less than twenty percent down. As an extra assurance to make sure you pay other expenses, the mortgage company might require you to pay more than the principal and interest and hold extra for taxes and insurance. While not technically an additional expense (you owe taxes and insurance no matter what), it might mean your monthly costs are higher than you were expecting.
While the largest cash outflow during the process is typically your down payment, the good news is that you own an asset in return. However, closing costs are truly a sunk expense and can total a surprising amount. From loan origination fees to legal fees to real estate agent fees, closing costs can total between 2% to 5% of the sale. On a $500,000 home, closing costs could total from $10,000 to $25,000.
Home Maintenance and Repair
Last, but definitely not least, are home maintenance expenses. With stricter lending standards, it is much harder to finance any repairs through a mortgage. Costs can vary by property, but like most things in life, can quickly spiral out of control if you don’t plan ahead. Repairing things yourself can keep the costs down, but can also be quite the commitment if you're not prepared. Finding a trusted contractor to come through even before purchasing the home to put together estimates can help prevent any major surprises from springing up in the future.
As with most decisions, home buying can be complex and it is important to realize that there are far more expenses to consider than just the purchase price and down payment. Make sure to have significantly more saved up before making the big purchase. Many times it is better to be house poor and cash rich than the other way around.
Browne, Andrea. (July 17, 2015). 5 Hidden Costs That Surprise First-Time Home Buyers. Kiplinger. Retrieved from: http://www.kiplinger.com/article/real-estate/T010-C006-S001-hidden-costs-that-surprise-first-time-home-buyers.html.