The hidden costs for home buyers are like the skeletons and creepy creatures that try to frighten you in a haunted house at a summer carnival. They pop-up when you least expect them and they make you think twice about proceeding further down the path of no return.
Of course, when you enter a carnival’s haunted house, you know the experience is just for fun and you’ll laugh when you emerge. On the other hand, obtaining a mortgage and buying a home (especially your first one) is all business and no laughing matter. With that in mind, let’s take a look at the top 5 hidden costs of the home-buying experience, so you’ll be fully prepared and won’t suffer from a case of the jitters in the middle of the process and have second thoughts about proceeding forward.
But before we do that, you should know that none of these “hidden” costs are actually hidden. They’re known ahead of time by anyone who does their due diligence about the home-buying process. In addition, many of the not-so-hidden costs listed below are indicated on the Good Faith Estimate Form (GFE) from the U.S. Department of Housing and Urban Development (HUD). They’re more like extra costs you need to consider on top of the actual amount of a mortgage. According to the federal government’s Consumer Financial Protection Bureau:
The Not-So Hidden Costs for Home Buyers
To come up with a Top 5 list of extra costs associated with buying a home, we reviewed 10 online articles from reputable organizations (see Reference Sources list at the bottom). Then we counted the number of times an extra cost was mentioned in any of those articles. Here is the resulting Top 5 Hidden Costs for Home Buyers list:
- Total Cost of Ownership – Maintenance & Repairs (HVAC, plumbing and electrical systems), Lawn Care & Landscaping, Locks, Renovations, Furniture & Decorations: (9 mentions) – All of these costs arrive after you move into your new home, but they definitely need to be considered before you make the commitment of being a homeowner. Make sure you don’t buy a home that is so expensive that you can’t realistically afford to live in it. If the first house you buy is a relatively inexpensive “starter home,” you’ll be able to adjust to the monthly budget you’ll need to maintain it. After a few years, you’ll have a true understanding of whether or not you can afford to move into a larger house. Expect to shell out a few thousand dollars annually for these expenses, not counting any furniture and decorations you buy.
- Property Taxes: (8 mentions) – This unavoidable cost to your local government will vary by location and property size, but odds are that it will increase in the future rather than decrease. Generally paid into escrow monthly. Covers expenses such as public school education, local parks, roads, and sidewalks. The average national cost of property taxes is over $2000 a year.
- Appraisal Fee: (8 mentions) – Several hundred dollars to ensure the lender that the house you want to buy is reasonably priced based on current market conditions.
- Home Insurance: (8 mentions) – A significant expense required to obtain a mortgage. It will increase above normal rates if your property is a danger zone (floods, earthquakes, hurricanes/tsunamis, volcanoes). Can come in handy after a catastrophe or a burglary. National average is around $1000.
- Closing Costs – Points or Loan Origination Fees: (6 mentions) – Can be several thousands of dollars on top of your down payment. Cash payment could range from 2% to 6% of loan balance after down payment. Points purchased up-front lower your interest rate throughout the life of the loan, so they’re a good one-time investment.
Other Extra Costs When You Buy a Home
We don’t want to scare you away from buying a house, but it’s better to know the full truth up-front rather than when you get too deep into the home-buying process. So, this list shows the other 20+ extra costs mentioned in the articles we used in our research:
- Home Inspection Costs: (5 mentions) – Your insurer and lender need to know the building and infrastructure are in good shape and won’t need major repairs in the near future. Usual cost is a few hundred dollars, but more for larger houses.
- Title Services and Title Insurance: (5 mentions) – Expenses related to transferring the property deed to you. Insurance protects against someone else laying claim to your property title and ownership. Could cost $500 to $2000 based on value of property.
- Utilities – Deposits and Monthly Charges: (5 mentions) – Electricity, gas, water, and garbage collection are basic needs. Internet access is probably a necessity too. Cable TV (or satellite / Netflix / Hulu) are secondary monthly expenses that add to your household budget. A monitored home security system or landline phone might also be priorities. Your four basic utilities alone could cost you about $250 monthly.
- Legal Fee: (4 mentions) – Optional consultation ensures complicated transactions that don’t use standard boilerplate forms are favorable to you.
- Moving Costs: (4 mentions) – It might be worth the cost to have professionals pack and transport your belongings out of your previous residence and into your new home. If you do it yourself, you may still need to rent a truck and buy packaging materials. Professional movers can run from $1000 to $6000, depending on the amount of items and distance covered.
- Escrow Account: (4 mentions) – An upfront payment to process paperwork and ensure your property taxes and homeowner’s insurance (and maybe PMI and HOA fees) are paid on time. An advantage of escrow is that your mortgage company will manage these payments.
- Private Mortgage Insurance (PMI): (3 mentions) – Required if your down payment is less than 20%. Protects the lender from default on the loan. Might be eliminated if the balance of the loan has been reduced below 78% of original purchase price. Can cost 0.3% to 1.5% of mortgage. Credit score and loan amount influence rate.
- Homeowner’s Association Fees (HOA Fees): (3 mentions) – Frequently a required fee (monthly, quarterly or annually) that covers the cost of maintaining community property in a neighborhood or development.
- State/Local Recording Fee: (3 mentions) – Will be different from state to state and city to city. Covers cost of official recording of purchase transaction documents.
- Pest Inspection Fee and/or Pest Control: (3 mentions) – You don’t want pesky critters living in your home before or after you move in, especially termites. Cost is around a hundred dollars. New houses may not need this service.
- Credit Report Fee: (3 mentions) – Lender might require this.
- Tax Service Fee: (2 mentions) – Ensures previously-due taxes are paid.
- Lender’s Origination Fee: (2 mentions) – Covers loan application processing. Calculation of fee based on percentage of loan amount, interest and points.
- Survey Costs: (2 mentions) – Verifies property line measurements shown on deed.
- Mortgage Interest: (2 mentions)- Currently in the 3% to 5% range. Obviously, a mortgage lender needs to charge interest or it is not a profitable transaction, so this is really not a hidden cost. Just be thankful rates are currently this low, because they were around 18% in the 1980s.
- Notary Fee: (2 mentions) – About $50 to prove you are you.
- Flood Life of the Loan Fee: (1 mention) – Covers governmental tracking of changes in flood zone designation of property.
- Document Prep Fee: (1 mention) – Perhaps charged by broker or lender.
- Document Courier Fee: (1 mention) – Quickly transporting legal documents crosstown at the last minute might be needed.
- Cost of Reselling the House: (1 mention) – After living in a home for 10 or 20 years, you may need to replace the HVAC system or apply a fresh coat of paint before someone else is willing to buy it. Staging the house to make it more appealing to potential buyers or a professional deep cleaning might also be needed.
- Real Estate Agents Fee: (1 mention) – A negotiable commission that could range from 1.5% to 6.0%. Normally, the Listing agent and the Buying agent split this fee, which is paid by the seller to a broker. Be sure to learn the details of working with a real estate agent or broker before you sign any agreements.
- Home Warranty: (1 mention) – Protects against cost of repairs to an older house. Can cost from $350 to $800, depending on coverage.
- Sewer Inspection: (1 mention) – Perhaps a few hundred dollars.
Good News About Hidden Costs of Buying a House
If you do decide to purchase a new home, understand that none of the hidden costs mentioned above are much different than they’ve ever been, except that mortgage interest rates are about as low as they ever been.
Home ownership is not beyond reach. You just have to look at all of the houses that have been bought and sold over the years to realize that it just requires a realistic financial plan (and a decent credit score).
If you can realistically afford to buy your first home, then you’re on way to bigger and better things down the road. If you would like to discuss your options for buying your first home in Zionsville or the surrounding communities, just contact us and we’ll help you make the right choice. Don’t be frightened; be a homeowner!
