When buying a home, there are many costs to consider. Purchasing a home requires a down payment, closing costs and ongoing fees like property taxes, homeowners insurance and maintenance. Questions like, “What is a home warranty?” “Do I need to pay taxes?” are all questions that homeowners have to ask themselves.
These upfront costs seem manageable on their own, but they add up quickly. Understanding these hidden costs will help you build a realistic budget before buying your dream home.
Down Payment
A large down payment can reduce the amount of money you’ll borrow as a percentage of the home’s value, which can lower your mortgage rate and monthly payments. It also cuts down on closing costs, which are a bundle of fees paid at the end of the process that usually run 2-5 percent of the loan amount.
The amount of your down payment may affect the type of mortgage you can get and whether or not you’ll have to pay private mortgage insurance, or PMI. Some types of loans require a much smaller minimum down payment, while special zero-down programs exist for veterans and service members, rural residents and certain first time buyers.
Aim to save for a down payment that meets your lender’s requirements but is realistic for you based on factors like property prices, interest rates and the timeline you have for buying a home.
Mortgage Payment
A mortgage allows most homebuyers to buy a property they wouldn’t be able to afford with just cash. But a mortgage payment isn’t just loan principal and interest— it includes property taxes, homeowners insurance, and homeowners association fees where applicable.
Those property taxes are calculated by the city or township based on the home’s assessed value. Homeowners insurance is typically required by the lender, and one twelfth of the annual premium is included in the monthly mortgage payment to be put into an escrow account. Your lender will then pay the insurance when it is due.
A general rule of thumb is that a mortgage payment should be less than 25% of your monthly income. But that number can vary based on where you live and other factors.
Property Taxes
As you finalize your mortgage, property taxes are another cost to factor into your homebuying plan. These fees are paid to state, county and local governments to fund a variety of municipal services like public schools, road upkeep and water/sewer line maintenance.
Typically, when a home is sold, both the buyer and seller pay some portion of the current year’s property taxes at closing. Depending on the terms of your contract, you might be able to negotiate with the seller or have your lender include it in your closing costs estimate.
LendingTree used Census Bureau data to calculate median property tax amounts in the country’s 50 largest metros. The figures can vary widely, based on the value of your home and its location. This could mean thousands in additional annual expenses.
Homeowners Association Fees
Homeowners associations are groups of homeowners within a community that set and enforce rules. They also manage common property and amenities. Prospective homeowners should keep HOA fees in mind when budgeting for a new home. These are regular payments residents must make to the association, and they usually cover community services like a pool or snow removal.
HOA fees vary depending on the neighborhood. The more amenities offered to homeowners, such as a clubhouse or a fitness center, the higher the fees. However, homeowners should weigh these expenses against the benefits of living in an HOA neighborhood.
Maintenance
As a new homeowner, you’ll be responsible for more than just your mortgage and property taxes. You’ll also have to budget for home maintenance and repair costs.
One easy rule of thumb is to save up 1% of the home purchase price for annual maintenance expenses. This will give you enough wiggle room for unexpected breakdowns and major repairs. It is also wise to invest into a home warranty that can cover expensive repairs like that of appliances.
The amount you should save will depend on the type of property and its location. For instance, a single-family home on its own will require different maintenance than a townhome or condo in a development. Fortunately, maintenance fees are usually listed clearly on listings.They will also vary by development. So, it’s important to research the specifics before you start your search.