Overlooked Expenses for First Time Homebuyers
If you’re a first time homebuyer, you’ve likely just learned the shocking truth that that there are several thousands of dollars of additional expenses and hidden fees.
You’ve done your research; you’ve talked with professionals who’ve advised you how to invest properly. Oh, you haven’t?
Well, you should, because you’ll quickly find out about some often overlooked expenses that can surprise people their first time out. Remember, an educated homeowner is one that’s better prepared financially for their new investment.
These are the type of overlooked expenses you’ll need to prepare for when you buy your first home:
Most first time homebuyers underestimate the cost of maintaining their beautiful home. You have to include maintenance costs in your monthly budget.
For one, you’ll need to be able to pay for emergency costs quickly if something happens that you didn’t anticipate. Also, setting this amount of money aside helps maintain your home’s value over time.
- Buying and owning a home is an bumpy, unpredictable ride. The only thing you can be certain of is that you’ll have a mortgage payment due every month. Will you be prepared if your furnace needs to be replaced? What if you need to hire a professional to replace the roof? You can avoid a financial emergency by budgeting accordingly now for these expenses.
- Coldwell Banker suggests that homeowners should budget between 1% and 4% of their new home’s value for annual maintenance. If you have dogs or two or more children, expect this number to be higher.
Don’t underestimate your down payment
Setting aside the right amount for your down payment can be tricky. Furthermore, some lenders offer “no money down” options on their loan programs. It’s best to avoid these options if at all possible. Why? The benefit of not having to include a down payment on your new home will drive your interest rate through the roof, and you’ll incur other costs as well.
- Set aside at least 20% of the purchase price of your new home for a down payment, especially if you’re borrowing money from a program that not compliant with FHA lending standards. Even though you’ll see 10% or even 5% down payments as sufficient in some situations, you’ll incur the often overlooked expense of PMI.
- PMI stands for Private Mortgage Insurance. Lending institutions require buyers who pay less than 20% for a down payment to purchase PMI insurance and pay it in addition to their mortgage every month.
- For example, if your new home is worth $150,000 and you only put down 3% (or $4,500), you’ll be required to purchase PMI insurance to cover the other 17% of the standard down payment. This contributes to a monthly PMI amount of $118.82 on top of your mortgage payment.
Don’t forget about closing costs
An astounding number of first time homebuyers tend to underestimate the amount needed for closing costs. In general, closing costs amount to approximately 3% of the home’s purchase price, but it can vary.
- Closing costs include important fees like lender fees, transfer taxes, legal fees, and title policies, but there are other costs associated with closing on a home you intend to buy.
- This is why it makes sense to hire an experienced local realtor who can help you accurately estimate your closing costs. They’ll also help you locate banks, lawyers, and other local vendors with the lowest fees.
- It’s becoming very common to see negotiated contracts that require a percentage of the closing costs to be paid by the seller. In some instances, they may even be willing to pay all of your closing costs.
Purchasing your first home is a rite of passage, just like getting married and starting a family. This is not an endeavor to be taken lightly, though. First time homebuyers can quickly get into financial hot water by overextending themselves or choosing a home that isn’t right for them right now.
The best approach to making this a joyous occasion is to be aware of all of the expenses you’ll incur as a homeowner, and budget accordingly. There’s no shame in waiting to buy your first house if the expenses are too steep to handle right now.