You mean I have to pay for that? Avoid these questions by seeing what you will be responsible for when you buy a house.
Home ownership is one of the most rewarding milestones you can cross off in life. Whether you are buying a home alone or as a couple there is some pride associated with setting roots and making what is potentially your biggest investment yet. However most first-time home buyers go into this process with blinders on. They want to buy a house, but they don’t know all the expenses that are associated with home ownership. So how much does it really costs to own a house and how can you make sure you stay ahead of the game?
The first step is to read this guide on first time home buyer tips that you should be aware of. The second step is to read these mistakes that you should avoid as a first-time home buyer to save money during the process of finding and buying a home you love. After you have the basics down then you can really get into how much money you will need when you buy a home initially and the costs that come after you have moved into your home.
Some of these costs are seemingly hidden because even your realtor will not bring them up because they don’t impact the buying process. A good realtor will mention them to make sure that you are aware of how much your monthly budget will change based on the home you buy. I have listed down all the expenses that you need to know about so that you can have a visual of how much it really costs to own a house.
Below is a diagram of home values by state and it basically tells you the best value you can get for your money. This will give you an idea of how much house you can afford depending on where you live.
Table of Contents
How Much It Really Costs to Own a House
One Time Costs of Owning a House
Down Payment
The recommended down payment for a house is typically 20%. That’s because if you have a larger amount to put down you can avoid paying private mortgage insurance which is a penalty that people who haven’t put down enough have to pay. To avoid this when you start house hunting ensure that you save as much as you can for your down payment. Note that if you have more money to put down you will get a lower interest rate which will save you money in the long term.
If your goal is to buy a $400,000 home for a 20% down payment you should have saved $80,000. This amount of money may not be accessible to most people but if you start saving early you can get to your goal without straining your finances. Please note that you do not have to have the full 20% as there are ways your loan originator can work with you to get you the best loan based on what you have.
A Federal Housing Administration loan for instance requires as little as 3.5% down. You would still have to pay the private mortgage insurance but with this lower down payment requirement you are not locked out of the housing market. Using my example this would mean that you would need to have $14,000 saved for your down payment.
Closing Costs
These are the fees that you pay when you find a home you want and decide to buy it. Most buyers are not aware of these fees until they seat with the loan originator and they are shocked by how much they need to put up upfront in addition to the down payment.
Closing costs can run up to 10% of the value of the home that you intend to buy. Using my example above if you buy a $400,000 home, closing costs are approximately $40,000 in addition to the down payment. Closing costs can be split between the buyer and the seller as you’ll see below and you could end up needing $20,000.
Closing costs that first-time home buyers are not aware of include:
- Appraisal fees
- Inspection fees
- Title insurance
- Property taxes
- Loan origination fee
- Homeowners insurance
The good news is that the closing costs can be split between the buyer and the seller. Depending on the negotiation terms your realtor makes it could favor the buyer to where you pay less than the seller. Additionally, you can request that the lender pay your closing costs which would mean that you pay a higher interest rate on your mortgage but you would still be able to get the house you want.
Find this awesome first time home buyer gift here.
Monthly Costs of Owning a House
Mortgage Payments
Now that you are not a renter you will be required to make mortgage payments that will mirror rent payments but now you own the home. It is important when you are discussing how much house you can afford with the loan originator to ask what your monthly mortgage payment will be. This will give you a realistic view of what you would spend verses how much money you earn. It will also help you to create a budget of what life would look like as a homeowner.
Remember that as a homeowner you will have other expenses that you weren’t responsible for before. It is therefore important to compare mortgage rates and to shop for the most favorable option for yourself. This will be impacted by your credit score but at least then you can pick a lender that isn’t the most expensive. In my experience credit unions always have low rates that are favorable for buyers. If your credit score isn’t where it needs to be use this link to start repairing it.
Homeowners Insurance
Homeowners insurance is included as part of closing costs, but it will be part of your expense after you buy your house. Homeowners insurance expense is impacted by where the house is located and the value of the home as well. Depending on where you live you may be required to pay additional insurance called hazard insurance.
Picture living in California where they have wildfires. You may be required to get insurance for this hazard. Another type of insurance you may be required to get is flood insurance. It may not be extremely expensive to get this insurance, but you should factor that in your calculation of how much it really costs to own a home. Keep in mind that if you have car insurance there is an opportunity to bundle up and save if your insurance company offers that option.
Property Taxes
These can be extremely high or low depending on where you live and the value of your home. As you shop for your home and you are picking where to live make sure you check property taxes. A house in one state may seem cheaper until you factor in property taxes. New Hampshire property taxes for example are notably higher than neighboring Massachusetts which will impact how much you spend towards the house in the long term.
You can set up an escrow account and the taxes can be included in the monthly mortgage payments. The lender will then make the payments when they are due. This will require that you fund the escrow account upfront. Alternatively, you can pay the taxes directly to the agency and you would either make monthly or annual payments.
Homeowners Association Fees
This will depend on where the house is located. If you live in a ‘controlled’ development where the homes must look a certain way and there are rules and such then you will most likely be required to pay HOA fees. These fees are not usually expensive but when you are searching for a home ensure that you factor that cost in your budget.
These fees are typically used for landscaping, repairs, maintenance and utilities depending on how the development is set up. When you are reviewing the property ensure that you note if there HOA fees associated.
Private Mortgage Insurance
As mentioned in the down payment section if you do not have 20% saved for the home then you will be required to pay private mortgage insurance. This essentially protects the lender in case you default on the loan. They are typically 2-3% of the annual payments towards the home. The good news is that you only have to pay this insurance until you have paid up to 80% of the home.
If you get a Federal Housing Administration loan where you only have to put up 3.5% of the value of the house this insurance will most likely be payable for the life of the mortgage. This means that as you explore the different types of loans that you can get you should also make comparisons of how much each loan will cost you in the end.
Utilities
Home renters in some instances are not responsible for utilities so having to pay for them may come as a shock when they become homeowners. Typically, renters are not responsible for landscaping, repairs and maintenance of a property. These costs are implied in the rent. However, as a homeowner all these expenses fall under the homeowner.
Ensure that you include these expenses in your budget so that you have an idea of how much your monthly household expenses will be. It may also be a good idea to save up for emergencies when something breaks down in the house. I have seen the air conditioning unit stop working in the middle of a hot summer or cold winter and that’s a repair or replacement expense that you cannot avoid.
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As you start to search for you home or even when you start playing around with the idea of becoming a homeowner factor in all these costs into you budget to know how much it really costs to own a home. Don’t be surprised when you have to cut back on your housing budget because you never want to be house poor.
