Perhaps you spent years building up your savings account to buy a home and now you’re ready to start looking. Buying a home is a major part of life, but even though you have the down payment ready many don’t think about the hidden costs of buying a home.
The process of purchasing a home is complex. It often involves banks, Realtors, lawyers, and others all so you can have the dream home you’ve always wanted. You’ll end up paying more than you thought you would because it’s not all about the down payment.
We’ve put together a list of 15 hidden costs that most people don’t realize when buying a house.
Hidden Costs of Buying a Home Includes Earnest Money
When someone sells a home, they can get many people interested in all areas of the buying process. When someone is interested in buying a home and intends to make an offer, the seller may request earnest money to prove you’re serious.
Earnest money is usually between $500-$1,000 that proves you’re serious about making an offer and not just thinking about it. They may take the home temporarily off the market, so you can get the financing together.
The good news the money either ends up going to the down payment or you get it back.
Many People Forget About Closing Costs
Closing costs is the blanket term people use for all the fees necessary to finish purchasing your home. It’s everything from title insurance, recording fees, and much more. Overall, the closing costs alone could be 2-4 percent of the total cost of the home.
Closing costs are paid at the end along with the down payment. If you’re not prepared for the closing costs, then it’s usually factored into the loan amount. It’s best to avoid this because you’ll end up paying more in interest through the years.
The County Wants Its Property Taxes
If you bought the home at a tax auction, then you’ll need to pay off the back taxes before you can own the home. Property taxes are all part of owning a home.
Many banks will add property tax payments to your monthly mortgage payment and place it in escrow until time to pay. Check with the bank to determine if they do this. If not, then you’ll have to take care of it every year.
If you don’t pay your property taxes, then the county can take your home.
You Need to Insure the Home
If you bought the home from a bank, they’ll require homeowner’s insurance. This covers costs for any disasters that might happen such as fires, etc.
Depending on where you live, homeowner’s insurance can be expensive. For example, it might be smaller in Montana where there are few natural disasters, but more in Florida because of the threat of hurricanes.
The good news is this is usually rolled into the monthly mortgage payment. If not, then it’s one more expense you’ll need to take care of when buying your house.
How Much in the Escrow Account?
The bank is very risk averse. They don’t want to worry about you paying your taxes and homeowner’s insurance, so they may request you fund the escrow account for one year of expenses. You’ll need to come up with enough money to cover the taxes and insurance for a full year.
Why? It helps with risk and it also makes sure there is money for any potential tax increases for the year. This is one reason why it’s always best to have more than just the down payment for the house.
You don’t want financing to fall through because you can’t pay the escrow account.
Good Schools Mean High Taxes
It’s not just the county that wants tax money, but the school districts as well. This is a catch 22 because you want to live in an area with a good school district if you have kids, but you’ll pay more in taxes for the privilege of living there.
School taxes can be high depending on the district. A good school district is good for children and for keeping home prices up too. It can be annoying if you don’t have children in the school system, but everyone pays the same.
What is Private Mortgage Insurance?
You’ve probably seen advertisements for zero down payment loans, or the bank says they’ll take a 10 percent down payment. It sounds like a great deal, but then they hit you with private mortgage insurance.
If you own less than 20 percent of the home, then they’ll charge you a set amount every month for private mortgage insurance until you own 20 percent.
Once again, this comes down to risk. If you decide to stop paying your mortgage and they foreclose, at least they’ve gotten the private mortgage payments from you to offset the cost of foreclosure.
Interest Rate Surprises
Most people don’t realize how much the interest rate for their mortgage loan impacts how much they pay over time. The higher the rate, the more interest the bank can charge you.
It’s a hidden cost in many ways because people pay way more in interest than they expect. If you have a higher credit score, then you can negotiate a better interest rate. This might be worth working on before buying a home as it can save you thousands in interest payments.
The Cost of Moving into Your New Home
Congratulations, you just bought your first home. Now you must move into it. In the excitement of buying their first home, people forget about moving. You’re not only dealing with the cost of moving your existing furniture and belongings, but you might need to buy more.
If you’re going from a one-bedroom apartment to a three-bedroom home, then that’s a lot of room you must furnish. You don’t have to do it all at one time, but no one wants to eat dinner off cardboard boxes because they don’t have a dining room table.
If It’s Broke, You Must Fix It
While you expect your new home to be move-in ready, no home is perfect. Maybe the inspection showed a few minor issues that you could overlook, or you got the price reduced because you said you would fix the issues.
Home repairs and maintenance are a vital part of homeownership. You might want to paint the rooms, lay down new carpet or install new tile. These are all added expenses that you should factor in when buying the home.
When you buy a home, you need to have the utilities put in your name. Many utility companies require a deposit before connection. They also often charge a connection fee, taxes, surcharges, and other fees.
They usually require the deposit upfront, but everything else is added to the bill. Depending on the utility company, the fees could be several hundred dollars.
The Cost of Home Inspections
We mentioned earlier about an inspection of the home. The lender will likely require an inspection before approving the loan amount.
You hire a home inspector to go into the home and examine every nook and cranny to determine if there are major and minor issues. If they look and see the wiring needs replaced, then the bank may require it fixed before approval or require the home price to be reduced.
Ideally, the inspector may find small issues, but nothing major.
When you’re in the process of putting an offer on the home through purchasing it, you might need a lawyer to draw up contracts and make sure all the legal jargon is correct.
Lawyers are expensive, but they’re necessary. The seller likely has a lawyer on their side to make sure they get everything they can, so you need a lawyer to protect your interests as well.
Bank Fees for Creating the Loan
The process for buying a home can be long and complex and the bank often charges to go through the process of getting you a home loan. Many times, this fee is required prior to the loan process beginning.
The cost can vary from lender to lender, but it’s usually 1 percent of the home value.
Commission for Real Estate Agent
If you’re not familiar with buying property or a home, then a realtor can be a very helpful resource. They work to find homes for you, visit them with you and they negotiate the purchase. They will help you through the entire buying process and have plenty of recommendations for you when it comes to buying a home. They can suggest a lender, inspector and other reliable resources that you may not know about.
The downside is you pay for the services when you pay for the home. Their commission is added to the home value when you get the home loan.
Buy Your Home with Confidence
The hidden costs of buying a home catch many people by surprise. They have the down payment and believe that’s all they need, but that’s not the case. Make sure you discuss each of these hidden costs with your lender or real state agency prior to purchasing the home.
If you want to learn more about buying a home, then please explore our site.