Homeownership: Understanding Hidden Costs
If you’ve decided you feel ready for homeownership, congratulations! Searching for a home can be an exciting and fulfilling process. But homeownership is a bit more complicated than substituting a mortgage payment for a rent payment. Owning a home includes costs you don’t have to think about when you’re renting, and they might take you by surprise. Here are some of the costs you should be prepared for.
Down Payment
How much do homebuyers put down as a down payment on their new homes? Because home prices vary so greatly by region, it's difficult (if not impossible) to find an average dollar amount. According to a 2021 survey by the National Association of Realtors, however, the average down payment is 12% of the purchase price.
That average varies significantly depending on the age of the homebuyer. Young homebuyers (ages 22-30) only put down 6% on average, depending on the cost of the home, while older homebuyers paid more than 20%. Why the discrepancy? Older homebuyers tend to already have a home (and equity in that home). Younger homebuyers relied more heavily on savings (84%), while older homebuyers drew on the sale of their previous home (55-60%).
Home Sale Closing Costs
On top of your down payment, you’ll have other closing costs. These are the fees associated with purchasing a house. They could include the following:
- Loan origination fee
- Points—these are optional, paid in exchange for a lower interest rate
- Home inspection report
- Appraisal
- Credit report
- Deed recording
- Notary fees
Some of these fees may be paid by the seller if you negotiate that outcome. Closing the sale typically takes 30-45 days before you can move in.
Insurance/Tax Costs
On top of these fees, there are also several types of insurance costs that might be rolled into your mortgage payment through a mortgage escrow account. These include the title insurance policy premium (if you buy title insurance), homeowner’s insurance, property taxes, and a private mortgage insurance premium.
Your mortgage lender manages these premiums through the escrow account, and you pay monthly allotments to your lender. For you, it’s all part of the mortgage payment, and you may not even realize what portion is the actual house payment, and what portion is homeowner’s insurance or property taxes.
Not everyone needs private mortgage insurance (PMI): buyers who put down less than 20% for their down payment are typically required to purchase this insurance because it protects the lender if you default on the loan.
Common Home Maintenance Costs
Now that you own a home, there’s no landlord to call if your dishwasher begins to malfunction or if your roof starts to leak during a heavy rainstorm. It’s up to you to handle any repairs or replacements, and these costs can be a shock to new homeowners.
If, during the buying process, your home inspection turns up any unexpected discoveries, such as a leaky roof, you can advocate for the seller to address the issue before you close. But they may say no, so it’s important to factor in future potential costs to your overall budget.
Here are few other costs you likely didn’t need to think about as a renter.
Heating and cooling systems. If your furnace or AC unit break, you’ll probably need to call an HVAC professional for repairs. Even a healthy system will need to be serviced, usually twice a year.
Plumbing. This includes maintenance of sinks, toilets, dishwashers, washing machines, and any of the associated pipes. You might be able to handle a simple sink blockage yourself, but a deeper pipe blockage might require a professional.
Roofing. A new roof can set you back a pretty penny.
Painting. An exterior professional paint job also isn’t cheap, but it extends the life of the house and minimizes other rot repair.
Pest control. Infestations of carpenter ants, borer beetle, or mice can cause true damage to foundational elements of the home.
Landscaping. Many people handle their own lawns and gardening, or soon learn to, but tree trimming might require a professional.
Appliances. They can stop working suddenly and it’s up to you to service or replace them.
Lighting and electrical work. Replacing lighting might be a feasible DIY project, but more complicated electrical work may require a professional. It’s always best to play it safe with electrical systems to avoid injury.
Home furnishings. When people buy a new home, they usually want to upgrade furniture and décor, paint the interior, and purchase new linens for the bathroom and bedroom. But buying new items all at the same time can put a real dent in your budget if you haven’t planned for it.
Home utilities. You may be accustomed to paying some utilities as a renter, but with a new home, you may have new bills you didn’t cover as a renter. These can include garbage, water, sewer, and recycling. Even if you did pay those bills while renting, they may be higher in your new home if it’s bigger.
By factoring various costs into your overall budget, you can prepare for the costs of homeownership and not purchase more house than you can afford.
The best way to be prepared for unexpected costs when you buy a home is to focus on building savings. If you need help shaping up your budget or shedding any lingering debt, our NFCC-certified experts can help. Begin your free, confidential assessment online anytime.
