When we are saving up to buy a home, we often focus exclusively on the down payment. If our savings amount to 20 percent of the total cost of the place then we’re all set, right? Not quite. A home purchase comes with lots of additional costs, and as we’re saving up for our first condo or coop, it’s important to factor all those costs in. Have you ever heard the term “house poor”? It refers to a situation in which homeowners are spending a large portion of their income on their mortgage, property taxes, maintenance, and utilities, leaving little income leftover. If we focus solely on the down payment, we can quickly find ourselves in a house poor situation. Instead, we should consider all the costs of owning a home so we can create a manageable plan. Here are seven costs you’ll want to factor in.
This is the most well-known expense associated with buying a home. It’s also the largest and most daunting expense, which explains why many people focus all of their attention on it. Most often, the down payment is 20% of the cost of the home. Some buyers may decide to put down more upfront, but we don’t usually have the opportunity to put down less. The down payment is a significant expense, and it’s often how people decide what home are in their price range.
You’ve probably heard of closing costs, but unless you’re a realtor or you’ve previously bought a home, you might not know what they entail. Closing costs are the expenses associated with the mortgage and closing on the purchase of the house. The exact amounts will vary by state, the cost of your home, the mortgage, and who you hire. Here’s a handy closing cost calculator to give you an idea of what it might cost. Some closing costs may include:
This one might come as a surprise but if you are buying a home with a partner, life insurance might be an important purchase if either of you couldn’t afford to make the payments on the home on your own income. Life insurance can protect you and your partner from a precarious (or nearly impossible) financial situation should something happen to either one of you.
There are a variety of other, miscellaneous costs associated with the purchase process, many of which protect you as a consumer. As part of the home purchasing process, you will have to get a home inspection. Even though it is another additional cost, this process is well worth it for your safety and peace of mind. You will typically pay for a home inspection out of pocket, so you will want to plan ahead for it. The cost of the inspection will vary depending on location and the company you choose. If you are moving into your new home from a rental, you will also want to purchase homeowners insurance (while canceling your renters insurance). The first year of homeowners insurance will likely be included in your closing cost expenses, but it’s something you’ll want to factor in going forward on a monthly or annual basis. You will also hire a real estate attorney to represent you and advocate for you throughout the process. Typically half of their fee is due at signing and the remainder is due at closing.
Yay! You bought your place. Now you have to get all your stuff there. You will incur varying costs depending on how much stuff you have to move and how far it has to go. While moving expenses might seem insignificant compared to your down payment and closing costs, not planning for the move in advance can really mess up your cash flow. When making your planbudget, get estimates from some reputable movers in your area to see how much you should save up or account for.
When you move into your home, you’ll likely want to start adding your personal touches. This is what makes a house feel like a home! Decor costs should be included in your home planbudget, as should any renovation expenses, which can be significant if you are investing in a fixer-upper or doing construction or projects to fix things that came up in the home inspection. Even if you decide that all you want to do is change the paint or hire an interior designer to help you decide where to put your furniture, these are things you should plan for in advance and factor in.
A rainy day fund protects you in the case of emergencies, and it becomes even more important when you become a homeowner. I recommend having a separate rainy day fund for your home in case something breaks and needs to be fixed or replaced. For example, our fridge broke a couple of days after we closed on our new place. This is something we replaced as soon as possible so we could keep food! Imagine if it had been winter, and it had been the furnace that broke! We can’t always put off a repair, so having the cash at our disposal gives us security and flexibility to handle emergencies. These one-off costs can be significant, and if we don’t put money aside for them, they can eat up a big chunk of our savings.