Home Buying » Home Buying Guides » Hidden Costs Of Home Buying: 11 Things To Know
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Hidden Costs Of Home Buying: 11 Things To Know

Whether it's property tax, attorney or HOA's fees, there are many costs to consider when you purchase a house, much more than you initially expected.
Author: Jack Wickens
Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.

Review & Fact Check: Baruch Mann (Silvermann)

Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.
Author: Jack Wickens
Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Many Americans find it better to buy their own homes rather than rent one. This is because the United States is one of the few countries where mortgage payments are often less expensive than rent. However, just because you’ll be paying less on your mortgage than your rent does not automatically mean it’s cheaper to buy a home.

In reality, there are many costs to consider when you want to purchase a house. Knowing the other items besides the down payment and monthly mortgage payment will prepare you for all the elements you will encounter come closing day. Plus, arming yourself with advance information will help you to negotiate with your broker or lender to waive or reduce some of the fees.

1. Appraisal and Home Inspection

An appraisal of your home entails an appraiser analyzing and checking if the value of your home correctly matches the purchase price. The appraiser will consider many factors in the process such as the neighborhood area, taxes by the city and state, how much the other homes in the area are selling for, etc.

Your lender will customarily require an appraisal because it helps them decide the amount they should lend to you. You would probably pay around $1,000 for an appraisal of the home. Independent from the appraisal, most lenders will also ask you to secure a home inspection. This is a requirement in case you’re getting a mortgage that the government insures such as an FHA loan.

Just like an appraisal, a home inspection also validates the amount of the loan vis-à-vis the value of the house. However, its main purpose is to ensure that the house is in good condition for everyday living. Should the house somehow fail the home inspection, you might be able to bring down the selling price.

If some serious red flags come out during the inspection, you can back out of your contract or you can ask the seller to fix the issues that the inspector noted down. A home inspection will usually set you back around $400 to $800 in fees.

Most Difficult Steps of Home Buying Process

2. Closing Costs

Closing costs are fees that the lenders will charge before they transfer the property to the buyer’s name. They include certain fees that come in the home sale and mortgage transactions, including (but not limited to) the following:

  • Property appraisal report. As discussed above, lenders require this report so they can properly peg how much money to lend you according to the property’s market value and their mortgage program’s parameters.
  • Credit report fee. A credit report gives your lender enlightenment about your financial background and helps them to decide based on your payment history and creditworthiness.
  • Flood certification fee. A flood certification (or flood cert) informs the interested parties whether the property’s location is an area that is prone to flood (flood zone) or not.
  • Underwriting fee. This fee is to compensate the lender for their effort and expenses in preparing the paperwork for the mortgage.
  • Title insurance. This is an insurance that specifically covers the new owners against any possible losses due to defects in the title of the property.
  • Origination fee. This is what the lender will charge you for making the loan available. It pays for their services in putting together the loan package for you.
  • Recording fee. This is what you pay to the government for registering your mortgage as a public record.
  • Application fee (some, but not all lenders charge this). This is what the borrower pays to the lender to compensate them for their efforts in processing the loan application.
  • Homeowners insurance premium. This pays for the insurance coverage against the home to cover losses and damages in the buyer’s home and assets and even liability coverage against accidents in the property.

3. Utilities

Maybe you don’t pay much attention to utility costs but they can run to a couple hundred dollars per month or more. In fact, they sometimes equal the property taxes that you pay. In the U.S., the annual national average on utilities is $3,000 per household.

To get a more accurate amount for your budget, as someone with a home in the neighborhood you’re considering to give you an idea.

Better yet, ask permission to look at their monthly bills and then adjust your budget according to the size of your home. You may be in for a surprise when you see the actual cost of lawn care, water bills, or even how much the groceries can cost.

4. Attorney’s Fees

You would often need the services of an attorney to close your mortgage. Of course, for each service of the lawyer, there is a fee that you have to pay upfront such as filing fee, notary fee, and escrow fee.

The filing fee will cover the actual filing of your property information and loan details at your local courthouse which will be responsible to record your ownership of the property.

Filing will also incorporate recording the transfer taxes and documents to your name as the new owner. The filing fee amount will depend on the number of pages of the documents and starts at $2 for the first page and goes down for the succeeding pages. The notary fee range from $10-$20 and pays the lawyer for notarizing your mortgage deed of trust. The escrow fee or closing fee is the payment to your escrow agent’s services for closing the mortgage.

The escrow fee is not less than $150. Depending on the state where you live, your attorney should be present with you at closing. Attorneys charge different rates and closing may take 3 weeks to several months. So, your attorney’s fee will depend on your situation.

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5. Moving Costs

Many times, it’s better to pay the professionals to pack and transport your belongings from your old house to your new home. Yes, you can do it yourself but you’d probably still need to rent a truck and buy boxes and packaging materials.

Professional movers charge anywhere from $1,000 up depending on the number of items you want to move and the distance to the new place.

6. Homeowner’s Association Fees (HOA Fees)

This usually something you can’t escape from whether the association bills you monthly, quarterly or annually. This will cover the cost of maintaining community property in a neighborhood or development.

7. Property Tax

In America, you pay property taxes to the local government and they assess your tax according to the value of your property. The money they collect becomes part of the fund they use to support community safety, schools and infrastructure.

If you want a source of ready references for your property tax budgeting, the Tax Foundation has a property tax data lookup tool by county.

Also, you can ask your real estate agent and lender for an estimate of fees for your specific location and situation.

8. PMI  (Private Mortgage Insurance)

If you take a conventional loan, the lender would require you to get private mortgage insurance (PMI) for your mortgage. Similar to other types of mortgage insurance, it protects the lender (not you) in case you default on your loan.

The lender will arrange the PMI with a private insurance company. You normally have to get a PMI when you have a conventional loan and your down payment is less than 20% of the home’s purchase price. In case you’re refinancing your home using a conventional loan and your equity has not yet reached 20% of the home value, you will also need a PMI.

9. Home Maintenance

When you’re renting a place and the air conditioner conks out, it can be a bummer but you can always call your landlord and he’s supposed to take care of it – not you. When you’re living in your own home, it’s a double downer because aside from the inconvenience, you’ll have to pay for the repair out of your own pocket.

It's obvious that as a homeowner, you’re supposed to shoulder your own home maintenance but many homeowners underestimate how much these unexpected expenses can run to. Clogged toilets, leaky faucets, and peeling wall paints are just a few of the inconveniences that surprise many first-time homeowners in their seemingly ideal houses.

Every home has different materials, contractors and environment so there’s no universal formula to calculate your annual maintenance expenses every year.

On average, owners of a newer home who do the simple repair work themselves and contract major work out to others will fork out 3% to 4% of the original purchase price every year for maintenance and 4% to 5% for an older home.

If you bought your house for $250,000, you’ll probably pay out some $10,000 to $12,000 in repairs and maintenance each year. It may seem a lot of money and it is. So, in case you’re one of the fortunate ones who do not need to spend that much, set it aside as an emergency fund for your home. Home warranty contracts can help curb some of the major costs of home repairs, but can still be pricey if you don't have any maintenance issues.

10. Earnest Money

Believe it or not, even before you sign the paperwork for your new home, the seller will already ask you to give out some money. When you make an offer on a home, the seller will ask you to hand over earnest money.

Earnest money is the cost of proving you are serious about the offer you made on the house. Consider it as a security deposit.

When you give the seller some money upfront, you’re showing that you’re not going to excite him with a good offer then later go and buy a different house. Your money is to show that you are not fickle-minded about the house.

Sellers will ask for different amounts but usually, it will fall in the range of $800. When the deal pushes through, the seller gives you your money back or applies it to the purchased of the home. However, if the financing doesn’t go as planned due to a problem on your end, you’d probably forfeit the money depending on what you and the seller have agreed upon.

11. Homeowners Insurance

Of all the expenses related to owning a home, homeowners insurance is probably one thing you shouldn’t skip.

This insurance coverage normally will protect you if a tornado rips your roof to shreds, if your plumbing bursts and makes a swimming pool in your basement, or if a thief runs away with your flat-screen TV while you’re on a holiday.

Insurance quotes will vary as they will take into account the value of your home, your insurance claim history, and whatever deductibles you identify. Similar to the other aspects of buying a home, the premium can vary a lot according to location, especially since some areas are naturally more hurricane-prone or near an earthquake fault line.