Are you planning to buy a new home but don't know much about the hidden expenses that it involves? If yes, then this write-up will let you know all the hidden expenses that come with homeownership. Whether you are thinking of buying a condominium or an apartment as your primary residence or investment property, you are going to pay more than just your living and mortgage expenses. Yes, you read that right! An additional cost of owning a home or apartment is the monthly maintenance fees. The monthly fees cover the cost of upkeeping grounds, common areas, and buildings.
The monthly fees that you need to pay depend upon the location and size of your home. Of course, the location plays a significant role in determining the cost of an apartment or its monthly fees, especially if the property is located in a highly-preferred area such as the heart of the city or in the proximity of the basic amenities. If we talk about the payments made while buying a house, downpayment and mortgage are not the only expense. But, there are other hidden costs too that you need to know. With this in mind, here are some of the ongoing or one-time costs of homeownership that you as a homeowner need to be prepared for before you move to your new house.
1. Mortgage Payment
First, let's start with the most obvious expense, i.e., mortgage payment. In a layman's language, the mortgage is the amount of money that you borrow in order to buy a house or flat. When you buy your first home, you will probably need to obtain a loan from a renowned mortgage lender in order to make the purchase. So, until and unless you buy your house in cash, you will have to make a mortgage payment each passing month. The part of that payment will go towards your principal balance, and the remaining part will be used to pay insurance to your lender.
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2. Property Taxes
Another obvious expense of homeownership is property tax. Each year, you will have to pay property taxes on your house to the concerned authorities. The amount of property taxes can vary depending on where your live or where your house is located. If you have a mortgage, the property tax on your house will generally be paid in monthly installments to your lender. The lender will then put the funds in escrow and payout your entire property tax bill on your behalf before it becomes due.
3. Mortgage Insurance
If you put less than 20% down when you obtain a mortgage, your mortgage lender will most likely want you to obtain private mortgage insurance, which will automatically get added to your monthly mortgage payment. Federal Housing Administration loans or FHA loans have their own kind of mortgage insurance, while conventional and other kinds of mortgage borrowers can obtain PMI, i.e., Private Mortgage Insurance. This expense of homeownership can vary considerably depending on the type of mortgage you obtain and how much money you are putting down. You can even request to cancel your mortgage insurance after you pay down the loan to a Loan-to-Value or LTV ratio of 80%.
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4. Homeowners Insurance
Another expense that you have to bear with homeownership is homeowners insurance. If you have a mortgage on your house, you will probably be required to maintain a homeowners insurance policy. It is definitely a good idea to maintain insurance, even if you purchase your home outright. The homeowner's insurance can cover you excellently in case of a catastrophic event such as a fire. This expense of homeownership is paid on a monthly basis.
5. Escrow Prepaids
For your information, the property tax, homeowners insurance, and mortgage insurance are usually added to your mortgage payment and deposited into an escrow account. However, it is important to know that your escrow account does not just start from zero, and you will most likely be required to make an initial deposit at closing. This will give your escrow account some reserves in case your insurance bills or property taxes end up being more than the initial estimate of the lender.
6. Closing Costs
Closing costs are another vital homeownership expense that can vary highly on the basis of your house, location, and multiple other factors. In general, closing costs range between 1% to 3% of your home's purchase price but can be higher, especially when it comes to low-priced houses. In addition to the other expenses like prepaids, points, etc., common closing costs involve the fees of the lender for origination, processing, and underwriting the loan, title insurance, appraisal costs, credit report fees, etc.
7. Mortgage Points
Another hidden expense of homeownership that you need to know is mortgage points. Mortgage points are an optional homeownership expense you choose to pay when you obtain your mortgage. Talking about how it works, you can simply pay "points" on your mortgage, which is an up-front expense, in exchange for a lower rate of interest over the term of the loan. One point is equal to 1% of the initial principal balance of your loan, and this expense can be worth paying in several cases.
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8. HOA Dues
In case your new house is in a neighbourhood, or if you are moving to a townhouse or condo, there is a good chance that you will be required to pay some sort of HOA fees, also known as the Home Owners Association fee. This fee can vary dramatically depending on your location and the services the HOA dues cover. For example, some HOA dues only cover monthly expenses for common area maintenance, community pool, and a few other things. In contrast, some HOA dues cover expenses like building insurance, cable, yard maintenance, and much more.
If you are moving from an apartment to a new house, your square footage will likely increase. Since it costs more to heat and cool a larger space, you will indeed have a larger utility bill. Some of the most common utility expenses that homeowners need to pay involve electricity, water, sewer, internet, gas, etc. Always keep in mind that some of these utilities may ask for a connection fee or upfront deposit to start services.
Last but not least, here comes the significant wild card expense every homeowner needs to get prepared for. Over time, your house will need maintenance, and if you have been a renter, maintenance has probably been the responsibility of your landlord. Home maintenance expenses can vary from minor costs like replacing your air filters to major costs like replacing your roof. As a general rule, it is an excellent estimate to expect maintenance expense to be about 1% of your home's value every year. But remember, this can vary from one year to another and can be much higher for older homes.
Homeownership is probably one of the biggest decisions one can make! While moving to a new home, you need to weigh your optins and make sure you are well aware of the true costs. You may not have expected all the hidden costs mentioned above, but now it will surely help you create a comprehensive budget and find a home truly within your budget.