4 unexpected expenses to avoid when buying a home
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Guest post by Gabby HymanAttracted by low interest rates, millennials lead the way as 2015 became what Realtor Magazine called, "The Year of the First-time Buyer." They were joined by older consumers, who themselves competed to buy their first home in a tight market. With prices rising and affordability declining, many bought what they could afford – with a little left over for expenses.Despite forethought and budgeting, first-time homebuyers may not realize the full extent of the amount they'll need to get by. It's just not the full cost of the mortgage to worry about; there are immediate and long-term expenses associated with being a homeowner that can crush their expectations of affordability. In addition to rounding up competitive offers on mortgage loans, buyers should use online mortgage calculators, work with local realtors, and contact housing organizations to fully understand their financial obligations.The four most unexpected expenses when buying a home include closing costs, inspections, moving costs, and ongoing costs. Let's look at each of them.
According to Zillow, a prudent 2-5 percent of the home's selling price should be set aside to retire all closing costs. These include the:
Appraisal: $250 to $600 based on home size and state of residence
Loan application fee: From $100-$400
Lenders fees: APR should include charges for attorney fees, underwriting, notary, and recording fees
Title search: Between $400 and $600
Agent fees: 4 to 6 percent; paid up front or financed
Prorated interest: Applied to the first month of residency
Escrow charges: Depending on the lender, insurance and property taxes may be collected up front and put into an escrow account for borrowers putting down less than 20 percent
Title insurance: It's crucial to take out title insurance to avoid loss or litigation over who owns the home.
Federal legislation requires that lenders send mortgage applicants a Good Faith Estimate (GFE) detailing all closing costs. It's up to the buyer to include the closing costs in their budgeting and, where possible, discover portions of them which may be negotiable between the seller and lender.But before saying yes to likely home, a wary first-time buyer may want to order their own home inspection.
Pest or mold inspections may not be required for taking occupancy of a new home, but there can be pests on construction sites or in adjacent properties. It may cost as much as $600 out-of-pocket for a home inspection, which will prove more than worthy if it reveals rot, insects, bad pipes, or other factors that should kill the deal.There may be mechanical or structural problems that are too costly to bear. Perhaps the seller will adjust the price to account for repairs. If it seems worthwhile, get several estimates on the total costs of the work before haggling over the price. The inspection can also include a rundown of existing appliances, water heaters, garage doors, and so on.
The cost of moving within the U.S. averages $12,459, according to U.S. News and World Report. These costs include storage, damaged or lost items, delays that increase delivery times, and boxes and shipping.Then there are the costs of transferring or connecting utilities. There are new service charges, deposits and, if the new owner isn't careful, ongoing late charges for any service they failed to disconnect at their previous residence.Finally, there may be upfront homeowner's association fees to pay. The San Francisco Chronicle reports an annual condo association fee average of $200/month. This amount should be budgeted into the ongoing costs.
Insurance and taxes. Use a mortgage calculator to budget monthly insurance, mortgage principal/interest, and taxes. Expect to pay more for insurance if the home is in an area prone to flooding, hurricanes, and earthquakes. Insurance premiums can run from $300 and $1,000 a year, and the lender may ask for the first year up-front to complete the loan. Or the lender may charge two months of property taxes and hazard insurance. And remember that property taxes are in flux. A first-time homeowner can be hit with a whopping increase in property taxes in their second or successive years in the house.Maintenance and repair. Appliances can break down, garden hoses burst and flood the lawn, and chimneys catch fire. A 2015 study by Zillow found that the average American homeowner pays $9,000 a year on maintenance and repair. Common costs include paying for lawn care, servicing appliances, installing new locks, repainting the interior/exterior, and cleaning the gutters. Climate and location factor heavily in the cost of maintenance. For example, Boston homeowners pay $14,000, Zillow found, while Phoenix homeowners pay $7,550 on average each year. Note: Those who avoided the inspection process may have to pay for pest control.
Wear and tear. Anticipate replacing the carpeting, vinyl flooring, water heater, and cabinet hardware in the first five years, and the gutters, heating system, roof and decks in the first 15 years. New homebuyers need to ask how old things are and if there are repair or replacement records on big ticket items.Utilities. Moving into a house and getting a mailbox filled with utility bills can be a stunner for an unwary buyer. Some owners are moving from rentals where some or all utilities may be paid or discounted. The house may have a larger square footage to heat or cool, or the property can be in a pricey utility district.Upgrades or add-ons. DIY owners choose to save costs by tackling maintenance and repairs on their own. But that means they should budget ahead for buying new workshop tools, lawnmowers, hedge trimmers, weed whackers, shovels and sawhorses. Depending on the condition of the house they buy, new owners may be wise to budget ahead for roof repairs, new windows, or energy-efficient appliances.It's a cliché to say everything ends up costing more than bargained for. But knowing the common expenses and budgeting for them can spare a lot of grief after you sign for the loan.Gabby Hyman is a journalist with extensive experience in creating content for Fortune 500 web properties in finance, education, healthcare, and policy. His clients have included the California Governor's Office, Nissan UK, Avaya, Oracle, Yahoo, Microsoft Encarta, Hotjobs and LendingTree. He holds an MFA from the University of Alabama and a BA in English from the University of California.
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