The Hidden Costs of Homeownership

A home is one of the most significant purchases you’ll make in your life. It’s an exciting milestone that many families dream of, but it is an expensive investment that you need to be well prepared for.

Many first-time homeowners are shocked by the hidden costs of their new purchase. Being aware of the hidden costs of homeownership can help you gain an accurate picture of your future expenses and become better financially prepared for them. There’s nothing worse than putting down a large down payment, only to have a plethora of other expenses come up and really stretch your budget. 

In this article, we’ll go over everything you need to know about the hidden costs of homeownership including the initial, ongoing, and unexpected costs that could arise. The goal is to give your a better overview of what to expect when purchasing a home, and to help you budget appropriately to ensure you can maintain your new property. 

Initial Costs of Homeownership

Most people think that the initial costs of homeownership are in the down payment. While the down payment is a significant part of the cost, there are a few other expenses to be aware of.

Down Payment

A down payment is an amount the buyer pays upfront when purchasing a home. It’s a percentage of the total purchase which the buyer finances. Down payments typically range from 3% to 20% of the purchase price. In the United States, the most common down payment percentage is 20%, and under this, you’re typically required to carry PMI, or private mortgage insurance.

Saving money for your mortgage is essential because the larger your down payment is, the lower the loan-to-value ratio you will have, which can lead to lower interest rates.

This means that the more money you’re able to put toward your purchase, the more you will save on interest costs. It also reduces your monthly payments which can be a big help on your cash flow. 

Fortunately, there are alternative ways you can get a down payment if you’re unable to save the initial 20%. You can choose to buy private mortgage insurance which protects the lender if you aren’t able to make any more payments and default. Once the mortgage is less than 80% of the purchase price of the home, the PMI is no longer in place.

One thing to be mindful of is that none of your PMI payments go toward the principal balance of your mortgage, which means they are additional payments that are non-recoverable.

You can also look into getting accepted by a payment assistance program. Certain banks offer assistance programs to help those who are in the market for a home. The Federal Housing Administration also offers loans through FHA-approved banks or lenders.

Closing Costs

Before closing on the house, you’ll be required to pay closing costs. Closing costs typically range from 3% to 6% of the purchase price, but this can vary based on where you are located. Closing costs may include appraisal fees, loan fees, insurance, deed recording fees, and credit report charges. It’s important to include the closing costs in your budget so that you are financially prepared for the final cost.

Furnishing

You also might want to consider setting aside some money to furnish your home or buy needed appliances. Not all homes come with their appliances like washing machines or fridges (although most tend to), and depending on the size of your home you may want to buy new furniture. While not necessary right away, it can help make your new property really feel like a home, and is one of the more fun parts after closing. 

High-priority Improvements

You should also make sure you have set aside enough money for high-priority repairs or emergencies. For example, the first winter in my first home the furnace went out. This was a large expense of several thousand dollars, but luckily we had set aside enough money to cover an unexpected emergency.

There might also have been items that were brought up during the home inspection. It’s often a good idea to try and get a credit for these items from the seller, but that’s not always possible. Make sure you set aside money to address these especially if they could threaten the integrity of your home. 

Ongoing Costs of Home Ownership

After finally purchasing your home, you’ll want to start budgeting and setting aside money for the ongoing costs that come with being a homeowner. These are the costs you can expect to pay while living in your new home.

Mortgage Payments

Once you have your home, you’ll be required to make monthly mortgage payments. A mortgage is a monthly payment that is made up of four elements: principal, interest, taxes, and insurance. The principal pays down your loan amount, while the interest is the cost of borrowing money which is determined by your interest rate and the balance of your loan.

Property taxes are assessed and collected by your local government based on where you live and your home’s value, while insurance is the financial protection you need to have in case your home is damaged.

Maintenance and Repairs

Keeping your home maintained will increase its longevity and condition, making it a worthwhile investment. Hidden maintenance and repair fees can add up and cost a pretty penny, which is why it’s important to set aside a monthly budget for unexpected repairs. 

The most common routine maintenance you need on the inside and outside of the home includes landscaping, mowing, pressure washing, lighting, filter replacements, gutters, and security. Regularly maintaining these aspects of your home will keep pricey repairs at bay in the future.

Every once in a while, there may be an unexpected emergency. These unpleasant emergencies typically include burst or broken pipes, a broken furnace, an overflowing toilet, a leaking water heater, a power outage, a ceiling leak, and more. Having an emergency fund will help make these emergencies less unpleasant and easier to manage.

The exact costs of maintenance are tricky to estimate and are influenced by the size, age, and location of your home, among other factors. A good rule of thumb is to estimate about $1 per square foot annually for home maintenance. Budgeting for this helps ensure that you have enough money to keep your home in good shape and address emergencies if and when they occur. 

Homeowners Association Fees and Home Insurance

Homes that are located in a neighborhood, townhouses, and condos may come with monthly fees to the homeowners association, also known as the HOA. An HOA makes and enforces the rules of a subdivision and typically charges a monthly fee that goes toward maintaining and improving the properties in the neighborhood. Maintenance can include snow removal, pool maintenance, and more.

The fees will vary depending on the location of your home and the type of house you own. It’s common to have to pay initial fees to set up an account with the HOA, along with the ongoing costs. Snow removal, pool maintenance, etc. Budgeting for HOA fees will keep you financially prepared and on track with your monthly payments.

Property Taxes

One cost that many first-time homebuyers often overlook is property taxes. While generally part of your mortgage, property taxes persist even after the home is paid off. Property taxes are taxes that are paid to the local tax authorities of the country in which you live.

The taxes go towards paying for public schools, infrastructure renovations, and city and state employee salaries in your area. The price of property taxes depends on many factors such as where you live, and the value of your home. 

Property taxes are charged monthly and added to your regular mortgage payment if you have one. Structural changes like building a deck, pool, or any other fixture will increase your bill, so if you want to save on your property taxes, it’s best not to build until you’re prepared to dish out the funds.

As mentioned property taxes are always due even after you own your home outright. Check with your local tax authority to figure out how and when to pay them once your mortgage company is no longer doing so. Where I live in Illinois property taxes are paid twice per year, but other locations may have a different cadence.

Property Insurance

While home insurance isn’t required by law, it’s a beneficial investment that most experts recommend. Insuring your home can save you from major expenses down the line, as it helps protect you from theft, loss, or damage to the home. Home insurance can cover living expenses if you’re unable to live in your home for some time.

If you have a mortgage on your home, your lender will require you to have home insurance until the mortgage is entirely paid off. Your home insurance rate will depend on the location and age of your home, the cost of building materials, and the square footage.

Also, always be sure to read the fine print and understand the terms of your insurance. Some events, like flooding, might not be covered by the standard policy and require additional coverage. Other events, like wind and hail, might have a separate deductible that could be larger than the standard one. It helps to understand all these rules so you’re not surprised at the cost when you file a claim.  

Utilities and Lawn Care

As with renting an apartment or home, you will have to pay monthly utilities for services like electricity, cable, internet, and water. When you own a home, your utilities will typically be more expensive than when renting and are subject to change as prices rise. Home size here plays a big role as it takes more to heat/cool a large space. 

The lawn is another part of your home that needs regular maintenance and care, which can quickly add up. Lawn equipment like a lawn mower, leaf blower, and snowblower can be costly and should be budgeted for. If you have any emergencies like tree limbs falling, damaged roofs, or clogged gutters that prevent proper drainage, you may need to hire an expert to help repair and clean up your home. Take it from me, a tree coming down during a storm can add up to thousands of dollars in damages and removal. 

HVAC Systems

The heating, ventilation, and air conditioning systems in your home are essential to keep it warm in the winter and cool in the summer. They need to be maintained and checked regularly to ensure they work effectively throughout the year.

Some regular maintenance duties you can expect include changing the air filter in your furnace and air conditioner and hiring a professional to inspect the HVAC systems yearly. This will help limit any unexpected emergencies and keep your systems in great shape.

General Wear and Tear

It’s also a good idea to set aside some money for general improvements and wear and tear. It seems like small things are always breaking, a railing comes loose, a light fixture stops working, or a faucet becomes leaky or clogged. These are all small things, but they add up over time. Make sure you have a little cash set aside to deal with all the minor problems that seemingly never stop once you’re a homeowner. 

Unexpected Costs and Considerations

Along with the initial and ongoing costs of owning a home, every now and then homeowners can expect to run into an emergency. These unexpected costs can be pricey, but being prepared will help ease the stress of an unforeseen repair/

Home Inspections and Appraisals

Home inspections are an important part of the home-buying process that you don’t want to cheap out on. Most commonly ordered by the buyer, while a home appraisal is typically mandated by the mortgage provider. A home inspection provides a report on the overall condition and value of the home, while an appraisal determines the value of the real estate. A home inspection can cost anywhere from $300-$500, while an appraisal can be $300-$600, but prices will vary depending on the size of your home and the type of services provided.

To get approved for a mortgage, you will need to get a good appraisal. By hiring an expert real estate appraiser, you will get the most accurate measure of your home’s value.

Home Improvements and Renovations

Once you settle into your home, you will eventually want to get started on some home improvements and renovations for a home refresh. The price of these projects varies greatly and depends on the type and size of the project you’re taking on. Some of the most expensive home improvements and renovations include building an addition, remodeling or renovating a room, and kitchen and bathroom remodels. 

It’s vital that you establish a budget for bigger projects and consult a contractor who can give you clear prices and timelines that align with your budget and vision. There are also financing options available for a lot of larger projects, but be careful borrowing too much as it can strain your cash flow in the long run.

Appliances and Major Systems

Every home needs certain appliances and major systems to run, and these can easily add up. Major appliances include a fridge, freezer, dishwasher, washing machine and dryer, and more. While you can cut costs by running certain appliances like the washing machine, dryer, and dishwasher less frequently, you will still need to maintain them regularly to avoid surprise repairs.

Set aside an emergency fund for any unexpected repairs and replacements. Appliances like fridges, washers, and dryers are bound to break and need repairs—so taking the necessary steps to save for them will help you better manage your finances.

Plan For Emergencies

To finish things off, I just wanted to reiterate that you should always have an emergency fund. It doesn’t matter how new your home is, things are going to break and you’re going to be on the hook to fix them.

I’ve seen many people sink their entire savings into a down payment and be in a tight spot when something goes wrong. Don’t put yourself in that position, always keep a little in reserve to deal with life’s unexpected issues.

They say that only two things are certain in life, death and taxes. While that’s true, I’d like to postulate a third, something in your home is going to break, and usually at the most inconvenient time.

The Hidden Costs of Homeownership

Owning a home is an expensive investment that can help you earn financial stability in the long run. While most homes come with a hefty price tag, there are many additional costs and fees that first-time homebuyers don’t take into account. 

Closing costs, repairs, and property taxes are just a few of the additional expenses you should expect as a homeowner. By understanding all of these expenses and putting in place a clear budget, you can help save yourself from any surprise costs that could heavily impact you financially. Set yourself up with an emergency savings fund to keep you and your family prepared for everything that comes with homeownership.