What Does it Really Cost to Buy a Home?
When we are saving up to buy a home, it’s common to focus on the down payment. If we’ve managed to save 20% for the down payment then we’re all set, right? Not quite.
Have you ever heard the term “house poor”? It’s a very common situation where homeowners spend all (or most) of their savings to purchase their home and are typically spending a large portion of their income on home-related expenses (mortgage, property taxes, maintenance, and utilities) leaving little income leftover.
The down payment is typically the largest investment, but there are plenty of other costs that come along with it. And as we save for the purchase of a home, we’ll want to factor in all of those costs so that we're set up for success.
If we focus solely on the down payment, we can quickly find ourselves in that situation. Instead, we want to consider all the costs of owning a home so we can create a manageable plan or decide how much we want to have saved. Here are nine costs you’ll want to consider.
1. The down payment
This is the most well-known expense associated with buying a home. It’s also the largest and most daunting, 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 (a.k.a. invest) more upfront and some may have the opportunity to put down less, but a down payment of less than 20% comes with additional costs like private mortgage insurance (PMI) and a higher interest rate.
The down payment is a significant expense, and it’s often how people decide what homes are in their price range.
2. Mortgage closing costs
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 home.
The exact amounts will vary by state, the cost of your home, the mortgage, and who you hire. Here's a closing cost calculator to give you an idea of what they might cost you. Some closing costs may include:
Title insurance
Prepaid expenses (interest and taxes)
Wire fees
Loan origination fees
Additional taxes and fees
3. Other closing costs
There are a variety of miscellaneous costs associated with the purchase process, many of which protect you as a consumer.
Home inspection
You’ll have a home inspection to assess any damage in the home and ensure that everything is safe and working properly.
Even though it is an 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.
Homeowners insurance
If you are moving into your new home from a rental, you will also want to purchase homeowners insurance (while also cancelling 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.
Real estate attorney
You will also hire a real estate attorney to represent and advocate for you throughout the process. Typically half of their fee is due at signing and the remainder is due at closing.
4. Life insurance
This one might come as a surprise but if you are buying a home with a partner, life insurance can be an important purchase. Why? When you buy a home with someone else, you might be relying on both incomes to make the mortgage and maintenance payments.
In the case one person wouldn’t be able to afford the payments on their own, life insurance can protect them from having to sell the home or default on their mortgage if something were to happen to their partner.
Do you both need life insurance? It depends. If one partner is able to afford the mortgage payments on their own - without the other’s income - they don’t need life insurance to protect them when it comes to the home. If both of you do, then you’d want to get two separate policies.
5. Home emergency fund
When we own our own homes, we can no longer call the landlord when something isn’t working. If our dishwasher breaks or the AC stops working, we’re going to have to foot the bill.
To prepare for these inevitable home repairs, create a new rainy day fund for your home (in addition to your regular rainy day fund). Alternatively, you can increase the amount you keep in your regular rainy day fund to cover unexpected home costs.
Our fridge broke a couple of days after we closed on our new condo. This is something we decided to replace as soon as possible so we could keep food refrigerated!
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 or increase our debt.
6. Property taxes
Property taxes are an annual tax that will vary by where you live and the assessed value of your property. The assessed value of your home is not the price you paid for it (which is called the appraised or market value). And the assessed value is usually less than the appraised value (which is good for our taxes).
Even so, depending on where you live, property taxes can be a significant amount of money each year.
The amount you owe in property taxes will change every certain number of years when the property is reassessed or if there is an increase in property taxes in your state. How often your taxes will be reassessed varies by state.
7. Updates, renovations and decor
When you purchase a home, you’ll likely want to start adding your personal touches or notice that some aspect (or many) of the home needs some attention.
Updates, decor costs, and any renovation expenses should be included in your home plan. These costs can be significant if you are investing in a fixer-upper or if many things arise from the home inspection.
Whether you want to paint or hire an interior designer, plan for them by factoring the costs into your plan.
8. Maintenance expenses.
If you are buying a coop or condo, you’ll likely have a monthly maintenance fee. This is money that the building uses each month for cleaning, staff, and reserves for larger projects. Sometimes when you see an apartment price that looks too good to be true, you’ll find it’s because the maintenance fee is astronomical - essentially a second mortgage.
Even if you are buying a house, there can be monthly or quarterly maintenance fees associated with the neighborhood upkeep. That might include maintenance of common lawn areas or street lights.
These are important costs to account for. If you are moving from an apartment to a home or even to a larger home, it’s important to account for any additional costs that you didn’t have before. Will your utilities be higher? Do you now have a lawn to take care of? An annual chimney cleaning?
9. Cost of the move
Yay! You bought your place. Now it’s time to get all of your stuff there. This is an expense we often forget about or underestimate.
Depending on how far you have to move and how much stuff you have, moving costs will vary. 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 plan, get estimates from some reputable movers in your area to see how much you should save up or account for.
Incorporate these costs into your plan
While some of these costs might seem relatively small, they can add up and make a seemingly affordable home a stressful financial stretch.
By considering these costs in deciding how much to save up for our home, we’re better equipped to explore the housing market and make an informed choice..
Happy home hunting!