When my wife and I purchased our first home, we focused on the initial purchase price and weren’t really concerned with anything else. We were saving money by buying a house – our payment was lower than monthly rent for a two-bedroom townhome. We couldn’t wait.
And we got lucky. Several high-dollar items were found during the inspection that the owners had to fix, and our 20+ year old HVAC made it until we sold the home a few years later. Since then, we’ve realized that it’s imperative to go beyond the purchase price and budget for other events and expenses that can – and will – arise when you become a homeowner.
Mortgage, taxes, and insurance
Most buyers set up an escrow account when they purchase a home. An escrow account is where part of your payment accumulates to pay for your homeowners insurance and property taxes. Essentially, the mortgage company divides these bills by 12 (adding a little more in case there are unexpected increases) and adds that amount to your mortgage payment.
This can add hundreds of dollars to your monthly payment. For example, our current home mortgage payment is $1,100 per month. Add the insurance and taxes, and it becomes a little more than $1,600 per month. And while we have a fixed-rate mortgage, insurance and taxes don’t stay the same from year to year. In just six years our property taxes have increased by almost 50% simply due to the increase in home values.
Adjustable-rate mortgage (ARM)
More and more purchasers are eschewing fixed-rate mortgages since rates have recently topped 7%. If you are in this boat, know that your base mortgage payment will change after the fixed-portion of your ARM has passed; it may rise, it might drop. Be sure to keep an eye on rates as you near your adjustment period and budget extra if it looks like you’ll be paying more.
An additional hidden cost that comes from using an ARM is the cost to refinance as a fixed-rate mortgage when rates come down. Yes, you can hide the fees into the new loan, but you will go from paying fees up front to paying them over the life of the loan.
Homeowners Association
Homeowners Association (HOA) fees cover the cost of maintaining common areas, amenities, and enforcing community rules. Before committing to a home with HOA fees, it’s essential to weigh the benefits against the costs. While the fees might cover services like lawn maintenance and garbage collection, they can also restrict your freedom to make changes to your property. Make sure to consider your lifestyle and priorities before diving into an HOA agreement.
Initial renovation and decorations
When you find THAT house – the one you can see raising your kids in or perhaps having your grandkids visit – it’s easy to mentally update and repair the house. You’re walking through thinking, I’ll paint this room blue or I’ll add a screened porch back here. Not only does this require lining up contractors or finding the time to do it yourself; it requires money. Yet if you’ve maxed out on the purchase price, you may not have enough to even paint before you move in.
Ongoing maintenance
When we bought our current home, we knew from our inspection that the HVAC system was old and needed some attention. A year later, it needed replacing. The landscaping was “mature” – think overgrown – when we moved in. I spent weekends getting it under control, and have spent even more time keeping it under control. There are a lot of things you can do yourself to hold down on the costs, but you will spend money for ongoing maintenance to preserve the value of the home.
Unexpected fun
A few months after we moved into this house – just as my team’s first college football game was starting – I heard water running. Fortunately, it was simply a toilet that was continuing to run, but the mechanism was broken so there was no easy way to fix it. I turned the water off at the valve and enjoyed my game. The following week, I replaced the toilet.
More recently, the night before I was to go to the doctor for a test, I felt water (what’s with the water??) underfoot in the bathroom. My wife and I spent two hours pulling up carpet and dry-vacuuming a floor. The plumber found the drain line from the shower had separated so water was just streaming out.
In other homes, we’ve needed electrical work done, appliances repaired, hot water heaters replaced, new lawn equipment purchased…the list goes on and on. You definitely want to have a separate savings account or a little extra in your checking account for times when the unexpected happens.
Utilities
If you went from renting to purchasing a home, you were used to paying some of the monthly utilities that come with a new home. Most people had to pay for electricity or gas service, and you might have paid for water or internet. However, your utilities often go up when you move into a larger home. Suddenly it’s hundreds of dollars to heat or cool your home. And what’s this charge for garbage pickup? We’ve always asked for a list of the last 12 months of utility bills when purchasing a home just so we’re not totally floored when the first bills arrive.
Selling
You might live in your first home forever. We lived in our first home two years, and the longest we’ve been in any home is seven. That means that each time we’ve sold we’ve spent money getting the house in tip-top shape and hiring an agent (at 5% or 6% commission) to sell the home. One time we even rented a storage unit to help declutter the house.
Time
One hidden cost most don’t consider is their own time. When you rent an apartment, you don’t have to make time to cut the grass when it’s sunny on Saturday, even though you have plans and you’d rather cut it Sunday afternoon (when it’s supposed to rain). Cleaning a two-bedroom apartment is much quicker than a four-bedroom home. Even simple renovations can eat up months: you’re spending time researching contractors, meeting with several, then meeting with the one you chose, then deciding on finishes, time out of the house or time when you’re hearing saws…
All of this may make it seem that home ownership is one headache after another. And while it can be challenging at times, I’ve always thought it worth the hassle because it’s your place. You choose how you keep your house. You can have cats and dogs and snakes and whatever animals you want as long as you don’t break local ordinances. You can paint your bedroom pink with purple polka dots.
Just make sure that you are on the right financial footing to afford the house you’re purchasing. If you are handy, maybe a property needing repairs is right for you. If you’re not, a new build with several years of warranty coverage could ease your mind. Either way, save some money for the surprises or routine maintenance that will inevitably crop up.
Photo by Erik Mclean