Hidden Costs of Buying a Home
Buying a home can be a life-changing experience, and one of the most exciting personal finance decisions you make. However, it’s incredibly expensive, which can make it incredibly nerve-wracking.
To make the experience easier, you need to prepare ahead of time for some of the hidden costs that you’ll encounter along the way.
After all, the last thing you want to do is realize that you don’t have enough money to fund this initiative after getting started.
The Hidden Costs of Homeownership
- Lender fees
- Transportation expenses
- Earnest money deposit
- Home inspections and appraisals
- Closing costs
- Tools and appliances
- Relocation costs
- Monthly upkeep
1. Lender fees
One of the first fees that you’ll face when looking for a home are lender fees.
Most realtors encourage you to go through the prequalification and preapproval process when applying for a mortgage loan. While this isn’t required, it increases the seller’s likelihood of taking your offer seriously. As such, both are highly recommended.
Be prepared to pay roughly $600 to $800 in application fees between the prequalification and preapproval processes. Costs increase if you shop around for various lenders and submit more than one application. Still, it might be worth comparing different lenders to see whether you can get a lower interest rate on your mortgage.
- Check out our post on Best Mortgage Lenders of 2021
2. Transportation expenses
When looking for a home, you’re going to spend some time out on the road, driving from house to house.
Some people fall in love with the first house they look at while others spend months or even years looking for the perfect home. Truth be told, there is no telling how long the process might take.
Sometimes, a real estate agent may offer to drive you around to look at homes. This is a great opportunity to connect, ask questions, and strategize with the agent. It’s also a good way to save on gas money, which can add up if you are aggressive about searching for properties.
You’ll also do a fair amount of driving as you look at various properties and explore different neighborhoods. So, make sure to bring a credit card with you when you’re house hunting and budget for transportation costs.
3. Earnest money deposit
Once you find the property you want to buy, you’ll have to lock it down by putting an earnest money deposit down.
An earnest money deposit protects the seller in case the buyer backs out of their commitment to purchase the property. The cost is typically 1% to 3% of the purchase price.
The good news is the earnest money deposit goes toward the down payment of the property.
4. Home inspections and appraisals
After you put a deposit down on a property, you’ll need to officially inspect and appraise the property.
An inspection assesses the condition of a home. For example, an inspector analyzes a home for structural defects, electrical problems, and HVAC quality, among other things. The inspection process is for the buyer. Its purpose is to help the individual understand what they are purchasing.
An appraisal is an inspection that’s conducted purely for financial purposes. The appraisal confirms that the sale price matches the home’s overall property value.
Be prepared to set aside $1,000 to $2,000 for inspections and appraisals, depending on the size and condition of your house. You might need to cough up some more money if you want to run any specialty inspections, testing for things like mold or water quality.
5. Closing costs
The final stage of the buying process involves paying closing costs.
Be prepared to face a range of payments at this stage, including:
- Down payment (10% to 20% of the sales price; we recommend putting down at least 20% to avoid mortgage insurance)
- Real estate agent fee
- Lawyer fees
- Escrow (taxes and insurance)
Oftentimes, the real estate agent can negotiate the closing costs into the total mortgage price, giving you the option to pay them off over time.
Keep in mind that whatever you tack onto a mortgage translates into higher payments over the course of your home loan. So, if you can avoid delaying any payments and make them upfront instead, you should strongly consider this option.
The first thing you may have to do after closing a house is to spring for upgrades and repairs. At this point, you’ll need to analyze how much you have left in the bank and consider whether it makes sense to make any capital improvements. Pro tip: You’re going to be making repairs to your house the whole time you live there, so you might want to set aside an emergency fund for this specific purpose.
The IRS considers capital improvements to be upgrades that add market value to the property. For example, adding a bathroom or deck or renovating your kitchen are examples of capital improvements.
Some people prefer to make large-scale improvements before they officially move in so they can enjoy the upgrades and avoid further disruptions. Other times, homeowners delay capital improvements until there is more money in the bank. Further, homeowners often make repairs before they put their home on the market to entice the next buyer.
For the best results, spend some time analyzing the property ahead of time and try to get a sense of what you’ll need to do immediately after buying the property and what you can put off until a later time.
7. Tools and appliances
The amount of cash you spend on tools and appliances depends on a few factors, including the type of place you’re buying and the condition of the items in the house.
For example, if you buy a condo or apartment, you’re probably not going to need a lawnmower or lawn and garden equipment. These services are typically completed by property maintenance teams and covered in monthly homeowners association (HOA) fees.
As for appliances, there is a good chance your real estate agent can negotiate these items during the closing process. If you play your cards right, you could wind up with a new stove or a washer and dryer.
Iron out these details well in advance of closing. That way, you can avoid getting into a situation where you buy a single-family home and then have to borrow a friend’s push mower to cut your lawn because you don’t have any money.
Keep in mind that neighbors might well complain if you let the exterior of the house fall into disrepair. Unless you want to draw the ire of your new neighbors, make sure that you budget for exterior maintenance if your property requires it.
8. Relocation costs
There are also a variety of relocation expenses that you’ll need to consider when buying a new home.
For example, you may need to hire a moving company depending on how many items you have, which can cost hundreds or thousands of dollars depending on how far you’re moving. The moving company may also charge you to store items for an extended period of time while your house is being renovated and prepared for use.
In addition, you’ll need to set aside a few hundred dollars to transfer or update certain forms of documentation. For example, if you travel out of state, you’ll need to register your car and pay for a new driver’s license.
States have varying rules regarding how much time you have to update your documentation following a move. Do your due diligence to make sure you’re in compliance with those regulations.
9. Monthly upkeep
Once you buy a house, expect things to break — like your water heater, air conditioner, windows, lighting fixtures, electrical outlets — the list goes on and on. When you hear people joke about the joys of homeownership, this is what they are referring to.
As a homeowner, you may consider putting off repairs and tackling them at a later date. Don’t do this. Repairs can pile up and before you know it you’ll have a laundry list of critical repairs that need completion. And a small problem can become a much bigger one if you don’t take care of it. Ignoring the problem is an easy way to fall into debt — and for your house to fall into disrepair.
Fix issues as soon as they arise and build an emergency savings account to cover costs. Best practices say that you should have between $10,000 and $15,000 in the bank to cover these unforeseen expenses.
Why You Shouldn’t Be Afraid of Costs When Buying a Home
In many ways, the homebuying process is a test of your true financial measure. There are countless costs that you’ll face along the way, from a massive down payment, homeowners insurance premiums, and utility bills to property taxes, repair costs, and maintenance costs. Fingers crossed you never see a single termite on your property, too.
The process weeds out people who aren’t in a strong position to buy a home due to a lack of funds and cash flow. As such, one of the first things you should do when buying a new home is to perform a financial assessment to make sure you have enough money on hand to cover the costs you’ll face along the way.
If you don’t, you could wind up getting in over your head and end up broke within the first year of ownership. Depending on how bad it gets, your house may even fall into foreclosure.
By familiarizing yourself with the hidden costs first-time homebuyers often face, you can put yourself in a much stronger position to be able to pay every fee that falls into your lap as you settle into your new home, while maintaining enough money to still pay for all the other expenses and opportunities in your life.
Tips to Make the Homebuying Process Easier
Pick up a side hustle
As the above-mentioned costs demonstrate, buying a home is very expensive. If you’re on a fixed income, consider picking up a side hustle before you start looking for a home so that you can increase your cash flow and make it easier to cover costs.
For example, you can cook, write blogs, or work as a social media consultant. Look for jobs that align with your skills and enable you to make money in your spare time. The more money you have in your pocket when buying a home, the better.
Make sure your money is accessible
You’re going to need quick access to cash during the homebuying process to cover daily expenses and the large checks you’re going to need to write.
Avoid tying your money up in certificates of deposit (CDs) or in bonds. Consider a money market account that can act as a checking and savings account while providing high-interest rates. You can also use a high-yield savings account (HYSA) to store your money while you save up for a down payment. But you won’t be able to write checks against this type of account.
Ask your friends and family for help
When you’re moving, don’t go it alone. The process is stressful, and you’ll need all the help you can get.
Consider asking your friends or family members for help moving, packing, or storing items temporarily. They’ll probably be more than willing to help.
Asking friends and family members for help moving is a great way to save money. Plus, people are often willing to help new homeowners by donating old couches or appliances they don’t want or need.
Check if your moving expenses are tax-deductible
Work with a tax advisor to identify possible ways of saving money during a move.
For example, there’s a chance you can deduct certain items if you donated them to charity before a move. A tax advisor can tell you exactly what you’re allowed to deduct and what you should avoid.
Frequently Asked Questions
Should you buy food for contractors?
There is no explicit rule stating that you should take care of contractors when they do work for you. However, it’s a nice thing to do. And generally, the nicer you are to people who work for you, the friendlier and more appreciative they will be in return.
That doesn’t mean you should go overboard and buy your workers a five-course meal. Simply providing snacks and refreshments, pizza, or even beer can go a long way toward furthering the relationship.
Should you tip home contractors?
You’re not expected to tip home contractors. These workers usually bill by the hour or by the job, and so tipping is not expected. You shouldn’t feel obligated to tip.
What are homeowners association fees and do I have to pay them?
If you buy a property that’s managed by a homeowners association (HOA), you’ll have to pay fees. HOA fees go towards upkeep, landscaping, and improvements.
The amount you pay, and the frequency of payment, are up to the HOA board which operates independently of the mortgage lender. The vast majority of HOAs charge homeowners on a monthly basis, but some may charge quarterly. Make sure you check with the HOA to see how much you would owe and when payment is due.
If you don’t pay your HOA fees, the debt gets transferred to collections. You need to pay your HOA fee on time and in full to avoid any conflicts.
HOA fees tend to range in price depending on the location of the property and the quality of the complex. You might have to fork over anywhere between a couple hundred to thousands of dollars per month. Most HOA fees are also variable and can change from year to year depending on maintenance, repairs, improvements, and vendor contracts.
Can I use my IRA money to pay for a home?
There are certain exceptions that allow people with individual retirement accounts (IRAs) to access their money without paying the standard 10% early withdrawal penalty. However, it may not be a good idea to touch your retirement funds even if you are able to.
If you are in a situation where you absolutely have to use your IRA money to buy a home, you should strongly consider whether you are in a sound position to fund this investment altogether.
Taking money out of your retirement funds early is essentially robbing your future self due to the time value of money. In other words, any money you put away for retirement today is worth more tomorrow because it can collect interest and grow.
If you disrupt your tax-free or tax-deferred retirement money to pay for something like a house or education, you may set yourself back considerably in achieving your retirement goals.
Is PMI homeowners insurance?
Private mortgage insurance (PMI) and homeowners insurance are two separate things.
PMI is for borrowers who put down less than 20% of the home’s value at the time of closing. It’s designed to protect the lender in case you default on your loan. You’ll pay PMI fees at closing, and you can wrap them into monthly mortgage payments, too.
Homeowners insurance protects the homeowner against property damage, injury, or theft. Payment is usually included in the monthly mortgage payment.
The Bottom Line
A home purchase can be very intimidating from a financial standpoint. But if you can make it through the process, it could be one of the most rewarding things you ever do — and one of the best investments, too. That’s because you’re building equity and increasing your net worth over time.
But that’s only if you’re aware of all the hidden costs that you’re bound to encounter — and are prepared to absorb all of them whenever they came your way.