We’ve been “in the market” looking for a new home for about a year now. I’ve noticed that many times when people are calculating the costs of buying and owning a home (myself included), the foremost thought is of the down payment and future mortgage payment when they calculate how much home they can afford. Definitely saving up the usual 20% down payment is a huge feat and the monthly mortgage payment is likely to be the largest cost component of owning a home, but don’t forget to factor in these other hidden costs of buying a home, some little and others not so little.
- Closing Costs: Varies widely it appears. No one I asked during our home tours could give me a straight answer. But apparently Bankrate.com can. The average closing costs on a $200,000 loan in California is $1,834. Our loan is will easily be 3-4x that amount so anywhere from $5500-$7350. Closing costs are the sum of various fees you need to pay to get a bank loan and transfer the title deed.
- Mortgage Points: Another kick in the pants is points. It’s nice how they quote me a mortgage interest rate and then right when we’re about to sign all the paperwork does the concept of points come up! 1 point is equal to 1% of your mortgage loan or $1000 for every $100,000, so you can imagine it quickly gets expensive. Can you see that if your mortgage is around $650,000 that you’ll have to pay $6500 to buy down one point? Paying for points allows you to buy down your mortgage rate. How much it reduces your rate varies on the lender and obviously the market conditions at the time you’re buying. They say the general rule of thumb is if you plan on living at your home for a long time it’s probably a good idea to buy the point. I think this Bank of America explanation of points is a good one with an example too. Looking back on my first home buying experience, I think I recall I bought 2 points and now I regret it because about 3 years later the rates dropped even further and I ended up refinancing the loan to a new lower rate. So the savings I would’ve gotten from the points over a longer period of time was lost during my refinance. I should’ve just used that extra money and put it towards the down payment. There’s always the possibility of refinancing your home down the road and/or you might sell it you never know. Still, make sure you do the math and look at your break even point with points to see if it’s worth it for your situation.
- Private Mortgage Insurance (PMI): If you don’t put at least a 20% down payment, most lenders require you to get PMI to protect themselves in case you default. PMI typically costs 0.5% to 1% of the loan amount and you can usually stop paying it once you reach 20% equity. Zillow gave some nifty advice about piggybacking a smaller loan to help cover the 20% down payment, but I think if you can’t afford to put 20% down you should strongly consider if you can afford to buy that specific home at all. Having to pay for PMI should be a red flag that you might be buying a house too expensive for your budget. In my opinion, PMI is just like throwing money away, since you can’t deduct it and it’s not going into building your equity nor would you have to be paying it if you could afford to put 20% down. Taking out another loan on top of your home loan, well that also seems like a not so smart idea in my book.
- Homeowner’s Insurance: I actually didn’t know this was required when I purchased my first home, until Wells Fargo called me years ago to tell me to hurry the hell up and get some for our condo as it was mandatory. Geez thanks real estate agent, escrow person and loan officer for telling me about this additional cost requrement. The national average according to Zillow is $1000. That seems about right for Cali too.
- Homeowner’s Association (HOA): Don’t forget about this monthly fee that will never go away as long as you live in that home and if you read the fine print you should know that it can actually go up and there’s very little you could do to stop that. Not sure about outside California, but HOA ranges pretty widely in So. Cal for homes, from $0 to $400/month is what I’ve generally seen among the homes we’ve been browsing. I feel pretty good if I see a home with HOA less than $300/month.
- Property Tax: Not sure how property tax is doled out in other states, but here in California it comes twice a year, November and February. I think this makes it harder for some people, because they suddenly owe a large sum of money all at once. And if you didn’t know the average person has a hard time even coming up with $400 in cash for an unexpected expense let alone a few thousand (that’s how much property tax costs in Cali). Certain areas of California also have the dreaded Mello Roos tax. Mello Roos can add an extra $3000 to $5000 yearly on your property taxes. Yikes!
- Utilities and Trash: We’ve been living in a condo for the last 3 years where we haven’t had to really think about this, because all these costs are covered in our crazy high HOA. But once you buy a home, you probably have to pay for the water, gas, electricity and trash separately. Paying for the trash was a surprise to an acquaintance who decided to save on that cost by bringing some of her trash to work and disposing of it there. If you’ve already been paying for these items in your current home, keep in mind moving to a bigger home will probably increase the costs of these items.
- Landscaping Maintanence: Unless you’re purchasing a condo-type unit where you have no backyard, most likely you’ll have to pay to maintain it. Sodding and cutting the grass, pruning bushes and maintaining rose bushes, whatever is in your backyard you have to maintain it or pay someone to do. If you’re lucky (or unlucky) enough to have a pool, that also needs to be maintained.
- Furnishings: I’m guessing if you’re buying a new home, you’re upgrading from your previous dwelling, which also usually means your new home is larger and requires more furnishings. Rugs, lamps, decor, furniture, depending on your taste it all adds up quickly too. Sure they make it look easy on those shows like Design on a Dime to spend less than a thousand dollars to decorate the whole house or room, but in reality you don’t have a team of handy builders and designers to help you eek out every last penny from thrift stores and furniture junk yards. Even Ikea can get pricey too. We’re looking to get a Sleep Number King Mattress and that alone costs almost $3000. Nice designer bed frame not included. ?
- Renovations: Depending on the condition of the house you bought, you may need to put some money into renovations. Obviously this cost will vary widely depending on the renovation. From new carpets to re-doing the kitchen or replacing the water heater, costs can quickly escalate from a few hundred to tens of thousands.
- Home maintenance costs: Unless you buy a newly built home, you’re likely to run into some problems with your house, maybe even the first year you live there. From electrical issue, busted AC or heater, problems with the water heater, leak in the pipes, the problems can be endless and so can the costs.
So there you go, the many hidden costs of buying and owning a home. Don’t forget to factor in these costs when you start thinking about how much home you can afford and definitely once you get ready to buy one. Since a house is likely to be one of the largest, if not the largest purchase of your entire life, it doesn’t hurt to budget carefully before you sign those papers. ??