True story time. The day my wife and I moved into our house, while I was carrying endless boxes and pieces of furniture in from our old Ford, all the toilets backed up. Turned out the main sewer line was blocked by roots. Oh, also, my wife went into labor and we had to rush to the hospital. So we spent the night of our first day in our house in the hospital, where we had our son.
It was one of the happiest moments of my life.
It was also a little stressful. And by a little, I mean, incredibly.
Now, not everyone will have to face a major plumbing crisis and the birth of their first child within the first couple hours of taking possession of their first house. But, when it comes to buying a home, be prepared for some stress and some added expenses, because it definitely doesn’t end at the sticker price. In this article, I’ll prepare you for some of those expenses. As for the stress, I can’t offer much advice (except that a cold beer can work wonders sometimes).
Private Mortgage Insurance
Not to be confused with so-called "mortgage insurance" (a term-life insurance policy that has a fixed premium, but that decreases in value over time), private mortgage insurance (PMI) is a policy that your lender may force you to buy. I’m not going to lie to you: PMI is a bummer. You go through the whole process of getting approved, and then the bank basically turns around and says, "well, we’re a little nervous about all this debt (the loan), so you need to pay for private mortgage insurance, in case you default." Kind of seems like THEY should be the one paying for PMI if they’re so nervous about it, right? Well, they don’t. You do. And it can be costly—up to 1% of the loan, annually. Doesn’t sound like much until you realize that 1% of 200,000 is $2,000 per year, or more than $150 per month.
So how do you avoid PMI? Put more money down. I wasn’t being entirely accurate when I made it sound like the bank forces you to buy PMI because they feel nervous. It’s a little more quantitative than that. Specifically, the bank is looking for you to put 20% down. I know, coming up with more cash for the down payment can be tough, but if you can come up with 20% down, you can save yourself a lot of money. And remember: even though you’ll be spending more money upfront, that money goes toward your investment. PMI? That’s not something you’ll be collecting on, or getting any returns from. So, if you can, put 20% down. If you can’t, then sit down and figure out what 1% of the purchase price of your house will be, divide it by 12 and then figure on spending that much more every month.
Of course, you already know about property taxes. Perhaps you live in New York or New Jersey and are well aware of how high they are. Or perhaps you live some place that property taxes are very reasonable, and you feel like you’ve got a good thing going. Plus, when you sit down with the lender, they’ll do a good faith estimate (GFE) and they’ll include it in there. So you may feel like this isn’t really any additional expense at all. I felt the same way. And then one day I opened the mail.
Most people don’t buy houses hoping they’ll go down in value. Most people buy a house hoping they’ll actually increase in value. And when it does, that’s great news. But keep in mind, the property taxes you pay are not based on your purchase price. It’s based on the value of the house. Where I live, that’s determined by the county. So I was delighted to see that homes in my area were rising in value, and then one day I opened the mail and learned that it wasn’t just homes in my area; it was my home, too. The county decided our house had gone up in value by a few tens of thousands of dollars, and so that meant our taxes were going up. Definitely a good news/bad news situation.
Where you live, your home value may be determined by the city or some other jurisdiction. But, regardless of who’s crunching (or creating) the numbers, the outcome can be the same: rising values means rising property taxes.
So what can you do to avoid them? Well, you can actually appeal the valuation. It may not work. But sometimes it does. But keep in mind, if you convince the County (or whoever) that your house isn’t really worth as much as they think it is, you can be working against your own long-term interests: having a home that’s increased in value.
Remember when I told you that all of the toilets in my house backed up on the very first day? Well, I wish I could tell you that was the last of our home repair issues. But it wasn’t. The roof in our bedroom started leaking quite suddenly and profusely. The evaporative cooler stopped working. The furnace stopped working. Turned out to be the thermostat and wiring. And speaking of wiring, our entire circuit breaker blew one evening. As both my father and father-in-law like to say: welcome to home ownership.
So how do you avoid repair costs? You don’t. You prepare for them by saving. Keeping a two to five-thousand dollar annual repair fund is an excellent idea, and can make home repair issues much less burdensome to deal with. And if something doesn’t need repaired one year, you can either keep the savings for the next year or do an improvement, which is not just an improvement to your house, but to your investment.
So, remember, think beyond the sticker price. Try to put down 20% or be ready to pay a significantly higher monthly mortgage payment thanks to PMI. Be prepared for bigger tax bills in favorable real estate markets. And, lastly, know that something big is going to break. Hopefully it won’t be the day you’re moving in AND having a baby, but take it from me: it certainly could be.
Photo credit: Matt Cornock