Most homebuyers consider only the mortgage payment in their calculation of how much a house will cost when purchasing a home. Still, the true cost of homeownership extends far beyond interest and principal. There are hidden costs that can gobble up a large chunk of your finances and overall financial health if you’re caught off guard. Understanding these additional costs will make you a more informed shopper and avoid a financial blind-side in the future.
Closing Costs and Fees
One of the first hidden expenses that you will have to foot is closing costs, which are required to close the mortgage. They can be loan origination fees, appraisal fees, title insurance, and other administrative fees. Most buyers underestimate the amount that they will have to pay for these fees, which can come to anything between two and five percent of the cost of the house. It is a wise move to go over all of the estimated closing costs with your lender or mortgage broker before locking in the loan.
And then there are non-negotiable non-refundable fees and negotiable or avoidable fees. Home purchasers do not need to hurry and spend some time window shopping for lenders with lower interest rates and fewer fees. It will make a huge difference to go through the itemization of the fees so you won’t be shocked when you close your home.
Property Taxes and Assessments
Property taxes are also a covert cost that tends to increase year after year and influence your total ability to pay for a mortgage. Property taxes may vary quite significantly based on the location where your house happens to be, and they might even increase from one year to the next. Many homeowners fail to realize their mortgage payment increases when their property taxes increase, especially if it is being placed into an escrow account.
Assessments are something else that could impact your expenses. Local governments or homeowner associations may put special assessments into place to help pay for the community improvements or infrastructure improvements. These are typically unexpected and may be an extra expense for owners who were not expecting other additional expenses for the property.
Homeowners Insurance and Private Mortgage Insurance
Homeowners’ insurance is essential for every homeowner who is mortgaged, and the price can vary based on location, home cost, and the type of insurance. While buyers usually factor in typical insurance costs, they may not expect rises in premiums in the future. Neighborhood risk factors, natural disasters, and even claim histories may lead to the insurance rate increased, which in turn makes payment higher than expected.
For individuals who make less than 20% down payment on the house, private mortgage insurance (PMI) is usually required. PMI is a monthly fee that insures the lender in the event of default. What most homeowners fail to appreciate is that this fee can take years to add up before they have an opportunity to have it dropped. Knowing the conditions of PMI and how it can be dropped at the first opportunity will save unnecessary cost.
Maintenance and Repairs
Home ownership comes with ongoing maintenance, and these accrue over the long term. First-time homeowners do not understand the cost of maintaining things like lawn care, plumbing, air conditioner upkeep, and roof fix. Each one of these will be very cheap per task, but they equal an annual charge that is measurable in the thousands of dollars.
Emergency repairs are an expense, as well, particularly for large problems such as foundation issues, water damage, or electrical issues. In contrast to renting, where maintenance expenses are the responsibility of landlords, homeowners pay out-of-pocket for these. Having a separate home maintenance fund can help buffer the expense of emergency repair bills.
Utility Bills and Homeowners Association Fees
Monthly paid utility bills are another not-so-costly component which most consumers do not factor in. Depending on efficiency and the square footage of the residence, the charges for heat, cooling, water, electricity, and trash removal will also vary. These homes utilize older systems which are more costly, not being nearly as efficient.
Homeowners association (HOA) fees will be an additional expense of homeownership, particularly when amenities and services can be enjoyed in the common area. HOA fees are not voluntary but mandatory and will grow over time as the association covers repair and upgrade expenses. Be mindful of HOA rules and fees when purchasing a home so that your wallet will be free of surprise problems.
One of the best methods of being prepared for unexpected expenses is establishing a detailed budget taking into account all the potential expenses of home ownership. Another way is to be advised on costs and assisted in obtaining the most appropriate mortgage terms based on your finances by an experienced mortgage broker. If you are prepared and informed about unexpected expenses, you will be able to enjoy homeownership without surprise financial expense.
