Buying a house is an exciting journey, but it can also be stressful (and costly), especially if you walk into the process unprepared, something far too many people do. In fact, over a third of home buyers said they underestimated the total costs of homeownership.
Sure, the price tag may be the biggest cost up-front—but the sale’s price is just one expense homebuyers must consider. Beyond mortgage and insurance, there are additional costs all new homeowners need to factor into their buying budget.
We’ve gathered 10 of the most common costs homebuyers forget about when they’re on the hunt for a new home to help guide you throughout the real estate market.
Let’s dive in.
Cost #1: Property Taxes
Property taxes are inevitable but easily overlooked in the home buying process. Some lenders may roll your property taxes in with your mortgage, meaning they can be easy to forget about, but you still need to account for them in your budget.
Property taxes may be of little concern in some areas and a tremendous expense in others. Don’t forget—property taxes aren’t stagnant; they have the potential to rise over time!
Do some digging into what you can expect to pay when moving to a new area, as this could be a deciding factor when relocating. You can ask for the property tax history on the home as well before making an offer, so you have an idea of how often the home’s property taxes have increased over the years.
Heads up: In some cases, property owners may be hit with a supplemental property tax bill at the end of their first year of ownership. This could happen if the county determines your house was undervalued at the time of sale, and you’re responsible for making up the tax difference in its new appraised value.
Cost #2: Closing Costs
Closing costs include a wide range of fees you pay at the end of a real estate transaction. Generally, closing costs are between 2% and 5% of the total cost of the house. While this isn’t a comprehensive list, closing costs include:
- Home inspection
- Lawyer fees
- Recording costs
- Appraisal fees
- Document fees
- Surveyance fee
- Title cost
- Sales brokerage commission
- Mortgage applications
- Home warranty
Make sure to ask your realtor to go over what is included in the closing costs to avoid any unpleasant surprises. While 3% may not seem like a lot, it can be quite an alarming bill if you don’t budget for it! Think about it like this: 3% of $500,000 is $15,000—and that money doesn’t grow on trees.
Cost #3: Earnest Money
Almost like a security deposit, the earnest money is what you put down upfront before even filling out paperwork. It’s meant to prove your seriousness in purchasing the property.
Think of your earnest money as a mini-downpayment, but similar to a security deposit, you will get your earnest money back if the transaction goes through. If you end up backing out of the deal, there’s a chance you may not get that money back. However, the stipulations regarding your earnest money should be clear in any contract you sign.
Earnest money can run anywhere from a couple of hundred dollars to a thousand or more. In a busy seller’s market like we are in right now, the offer with the most significant earnest money proposal may be more likely to win the bid on the house.
On average, earnest money offers are 1%-3% of the asking price, but your real estate agent will be able to give you the best advice for the current market and property.
Cost #4: Paying for the Escrow
When you close on your loan, your lender will collect funds to establish an escrow account.
Each month for a year, a portion of your mortgage payment will be put into your escrow account, and your mortgage service will use that money to pay your taxes, mortgage, and homeowners insurance bills when they’re due.
It’s expected that buyers will be asked to pay for their escrow account upfront to cover expenses like property taxes and insurance. Some lenders will require that extra money remains in the account, making escrow an important part of the homebuying budget.
Cost #5: Homeowner’s Insurance
Similar to property taxes, homeowners insurance may be included in your monthly mortgage rate and can also increase over time. And while they may be lumped in with other expenses, it’s important to remember it’s there–and that it could go up or down depending on your coverage needs.
The average cost of homeowners insurance is over $1,700 per year but varies significantly by state. Homeowner’s insurance is vital as it protects you if a disaster happens, such as a fire or natural disaster. So while it may be pricey, it’s worth it in the long run!
Homeowners insurance is only one policy you need to acquire. Other insurance policies to consider are flooding, earthquake, and liability insurance. You’ll make your choice based on the area you buy.
Cost #6: School Taxes
School taxes will differ depending on the district. If you have school-age children, you may be happy to pay more in school taxes if it means quality education for your child.
If you do not have children in or heading to school, you may want to pay close attention to what school taxes you will be expected to pay. Depending on the area, it could vary quite a bit from district to district. School taxes may be a factor in determining where you’re willing to move.
Cost #7: Interest Rates
Interest rates are unavoidable. But remember, having a good credit rating will likely result in a lower interest rate because higher scores translate to less risk to mortgage lenders—which could save you big over time.
As of early May 2022, the interest rate on a 30-year fixed-rate mortgage is 5.183% and is expected to increase throughout the coming months.
When interest rates rise, your purchasing power declines. Suddenly, your home buying budget isn’t as big as you thought it would be. Higher interest rates lead to more costly monthly expenses; that’s why when interest rates are lower, you can afford “more house.” Keep interest rates in mind as you’re shopping.
Cost #8: Moving Costs
Moving vans aren’t cheap, and they are only one part of your total moving costs. You will also have to consider the boxes, packing supplies, time off work, and labor (if hiring a company).
Account for these expenses in your home buying costs, especially if you’re making a long-distance move. The average price of moving hovers around $1,400, but long-distance moves can cost up to nearly $6,000!
If you’re moving for a job, see if your new company would be willing to help cover some relocation expenses.
Cost #9: Utilities
Remember to account for what utilities you’ll be paying for, especially if you’re moving into a bigger place. The move from a one-bedroom apartment to a three-bedroom home can result in a big change in utility bills! These include:
- Cable & internet
The installation of these services can also cost a chunk of change. Before you sign a contract, make sure you know the costs.
Cost #10: Home Maintenance and Repairs
At some point in your journey through homeownership, you’ll experience repair and renovations, especially if you purchase an older home. The most popular renovation projects include kitchen remodels, updating appliances, and upgrading bathrooms. These types of updates also add to your home’s value, which is helpful down the line when you want to sell.
If you know you’ll want to get in there and start renovating as soon as you get the keys, you won’t have much time to save after closing the deal. Remember to account for the cost of renovating your new home when building your budget. If you aren’t planning on doing repairs or renovations right away, start creating an emergency fund to prepare for any unexpected home repair costs later down the line.
Your home may also need significant repairs that are beyond aesthetics. These repairs generally come to light after the home has been inspected.
Don’t forget about ongoing maintenance! Things like lawn care and landscaping, cleaning the gutters, snow removal (if applicable), and pest control need to be factored into your home buying budget.
Arm Yourself And Get Ready For The Hot Real Estate Market
Adding the hidden costs of buying a home can be stressful, but facing the numbers head-on can help you and your financial planner better prepare for what’s to come.
While the housing market can be taxing, we encourage our clients not to rush the process and overextend themselves mentally and financially.
Whether you’re a first-time home buyer or an experienced one, fees can add up quickly. Be prepared and informed with the guidance and support of a financial planner from our team. Get in touch with us here.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article.
All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.
Updated June 2022