If you’re shopping for your first home, it’s easy to focus on the listing price. However, buying a home includes a number of upfront and ongoing expenses. If you’ve only rented up to this point, some of these expenses may surprise you.
If you’re ready to become a homeowner, here are the typical costs you should budget for:
Down payment and closing costs
Added together, these will be the big checks you write when you buy a home. Depending on your mortgage, you’ll need to make a down payment of 3.5 percent to 20 percent of your home’s value. If you put down less than 20 percent, you’ll need to pay private mortgage insurance (PMI), which protects the lender in case you’re unable to make your mortgage payments. You may be able to get rid of your PMI once you have 20-percent equity but it may require an appraisal, which is generally a few hundred dollars.
Closing costs amount to roughly 2 percent to 5 percent of the home’s value and include a number of fees that you’ll pay when you close on the new home.
Unless you plan to buy your home outright in cash, you’ll join the majority of homeowners who took out a mortgage to finance their home purchase. You should understand the various expenses that will be rolled into your monthly mortgage payment. These include:
- Principal: The original amount you borrow. For example, if you bought a $100,000 house and put 10 percent down, you’ll have a $90,000 principal.
- Interest: This is what you pay to borrow money. Interest rates can vary based on factors like your credit score, your lender, and the terms of your mortgage.
- Taxes: Property taxes are charged annually, but you have the option of paying them monthly as part of your mortgage payment.
- Insurance: This includes homeowners insurance and PMI.
Depending on where you buy there may be condo, co-op, or homeowners association fees. These can range from less than a hundred to well over $1,000 a month, depending on the amenities in your building or community. You periodically may be on the hook for a large sum (sometimes five figures!) to help cover the cost of major repairs if your community’s accounts are running low.
As a renter, your utility bills may have been partially or fully rolled into your rent payment. As a homeowner, you’ll be responsible for electric, gas, water, sewer, trash pickup, and other expenses.
Your first utility bills as a new homeowner may come as a shock. Something to keep in mind as you shop for a home is how much it can cost to heat and cool a larger space. As you tour potential homes, really think about how you’d use each room to avoid paying more for a larger home filled with rooms you’ll never actually set foot in.
Maintenance and repairs
Budget about 1 percent of your home’s value each year to apply toward yard work, professional home cleaning, repairs, pest control, and other maintenance costs. Some years might be more expensive if you need to replace a major appliance. If your home is valued at $300,000, this means setting aside $3,000 per year for maintenance costs.
A thorough home inspection before you close on a house will help you understand which major repairs will be necessary in the coming years, and something is more likely to go wrong in an older home. Prepare yourself!
Whether you buy a fixer-upper or just want to repaint a few rooms, you’ll need savings set aside for cosmetic changes. You may also have a kitchen or bathroom that will serve you for a year or two before you have the cash available to completely redo them.
Part of the fun of owning a home is getting to customize it to your taste, so don’t forget to budget for this.
A beautiful new home means you’ll have many rooms to furnish. It’s common to make do with older or hand-me-down furniture in a rental, and then splurge on your dream decor once you finally own.
If you moved further away from work, factor in the cost of your new commute. You may have to drive further, or even buy a car if you move from the city to the suburbs. According to AAA, adding just five miles to your commute each way could cost you an additional $150 a month.
What Can You Do?
Adjusting your budget to account for these new expenses is one of the most important exercises you can do. Many people find budgeting to be intimidating, but it can be as simple as writing down your monthly income and subtracting your typical monthly expenses. Once you know how much you plan to spend on a home, draft your new homeowner budget so you’ll be ready once you move in.
Increase your emergency fund
You’re guaranteed to have to deal with (and pay to fix) broken a washer/dryer, clogged gutters, backed-up sewers, and more. Keep your emergency savings in a high-interest savings account and set money aside specifically for unexpected home repairs. That way, when your basement floods during a storm, you won’t have to go into credit card debt to pay for the repairs.
Shop for a new home carefully
It’s easy to fall in love with a dream home at an open house, but be pragmatic when you house hunt. Keep all of these expenses in mind and know that the big yard means expensive landscaping, the high ceilings and big windows mean larger heating bills, and the well-appointed local parks mean higher property taxes.
In other words, every feature can come at a cost, so you should understand what you will need to pay for them. A home is likely the most expensive thing you’ll ever buy, so take your time and search carefully so you can find a home that matches both your needs and your budget.
Remember, as a homeowner, the minimum amount you’ll pay is your monthly mortgage whereas as a renter, the maximum you’ll pay is your monthly rent. Don’t forget to think about the cost of homeownership on a yearly basis with all of the additional costs, instead of simply looking at your monthly mortgage payment.