A growing preponderance of remote work (and remote learning), combined with low mortgage rates and young families yearning for more physical space, is driving a "pandemic real estate boom" in many parts of the country.
When it comes to purchasing a new home, it's essential to be realistic about what you expect to pay. While most people focus on their monthly mortgage payment, other costs related to the purchase are frequently overlooked. Some of these costs are one-time (paid at purchase or immediately after) while others persist over your entire ownership tenure.
Here's a recap of some important expenses to keep in mind:
Cost #1: Closing Costs
Closing costs is a catch-all term for fees that are paid during a real estate transaction. Examples include:
- Cost of inspection
- Lawyer fees
- Recording costs
- Appraisal fees
- Document fees
- Surveyance fee
- Title fee
- Mortgage application fee
- Escrow fees
In aggregate, closing costs commonly run between 2% to 5% of the home's purchase price. That said, some of these costs are optional, negotiable, or typically paid by the seller (ex: realtors' commission). Ask your realtor to review the expected closing costs to avoid any unpleasant surprises.
Cost #2: Earnest Money
Like a security deposit, earnest money is a good faith deposit to indicate your seriousness in purchasing a property (and to compensate the seller for the risk of taking the property off the market during the escrow period). It can range from a few hundred dollars to several thousand. Assuming the deal completes, the buyer's earnest money is typically applied toward closing costs. But if you back out of the agreement, you could forfeit this deposit.
Cost #3: Moving Expenses
While a cross-town move to a small apartment can be as simple as renting a truck, moving into a home often requires professional movers' assistance. Long-distance moves can be especially expensive. Make sure to account for this in your budget.
Cost #4: Renovating or Remodeling
When moving into a new home, consider potential repairs, renovation, or remodeling expenses. Typically, the prior owners had different tastes and lifestyle than yours. Will you replace windows, repaint walls, change tiles, add cabinets, or even remodel an entire kitchen or bathroom? It is often easier to do so before moving in but make sure to budget appropriately.
Recurring Costs of Ownership
Cost #5: Property & Parcel Taxes
Often, lenders bundle property taxes into your mortgage payment, potentially obscuring this ongoing cost of ownership. Moreover, property taxes can vary widely depending on locale (as low as 0.27% of the home's assessed value in Hawaii, vs. 2.47% in New Jersey), so it's especially important to make an apples-to-apples comparison when relocating.
Finally, property taxes are likely to increase over time. In some cases, property owners may be hit with a supplemental property tax bill at the end of their first year of ownership. This could happen if the county determines that your house was undervalued at the time of purchase. On the positive side, some states offer complete or partial exemptions to specific categories of homeowners such as retirees, seniors, disabled veterans.
Cost #6: Homeowner’s Insurance
Similar to property taxes, homeowner's insurance may be bundled into the monthly mortgage payment. However, it's important to remember that the premium will likely increase over time, depending on your coverage needs and your home's value. If the area is prone to natural disasters such as floods, hurricanes, earthquakes, or wildfires, expect to pay significantly more.
Cost #7: Utilities
Remember to account for the utilities you’ll be responsible for, especially if moving into a larger place or one with a big backyard
- Cable & internet
Maintaining a backyard pool, or cooling & heating a larger house may result in substantially higher utility costs than you are accustomed to.
Cost #8: Maintenance and Repairs
Home repairs are almost inevitable, especially when purchasing an older home. Experts estimate that annual maintenance costs will run between 1% and 4% of a home's value as a rule of thumb. Older homes frequently have more deferred maintenance issues, especially those listed as part of an estate sale. Moreover, you may find it necessary to hire additional helpers (ex: landscapers, pool cleaners) to maintain your property, and should factor this into your budget as well.
Cost #9: HOA dues and CC&Rs related costs
If you buy a home in a planned, covenanted community, you'll most likely be required to be part of a homeowner's association (HOA). You will pay monthly dues and occasional special assessments. The HOA community rules are described in what is called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). Abiding by these might also entail additional costs and potential penalties. Read them carefully before buying. If you fall behind in those dues and assessments, the HOA can get a lien on your home, possibly leading to a foreclosure.
Adding up the hidden costs of buying a home can be stressful. But facing the numbers head-on will help you better prepare for what’s to come. Finally, remember that the best time to buy a house, like any other long-term investment, is usually when most people are selling.
STILL THINKING ABOUT BUYING A HOME? LET'S TALK.
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