8 Unexpected Homebuying Expenses List
Don’t Forget These Unexpected Expenses!
For many people, buying a home will be the most significant investment they will ever make.
However, many first-time homebuyers are clueless about all of the costs that go into actually purchasing a home.
Most are familiar with the downpayment part of buying a home, but there are several additional costs that most people overlook.
Just because you have the money to purchase a home doesn't necessarily mean you have the money to own a home and all that comes with it, year after year.
Let’s dive into the eight unexpected costs that many first-time homebuyers overlook to make you a more informed buyer!
Unexpected Homebuying Expenses
1. Inspection Cost
Average Cost: $300 - $500
You found your dream home. Everything looks great. But then, as you’re wandering into the bathroom, you notice a small water leak dripping down from the ceiling.
You then start to wonder: What other potential hidden issues might be hiding in this house?
Well, that’s where a home inspection comes into play!
The purpose of a home inspection is to have an expert come in and evaluate the condition of the house and the functionality of all installed systems.
If you are taking out a loan with a bank, a home inspection is almost always required to protect the bank from over-financing a home that might have hidden issues.
You can usually skip the home inspection process if you pay with cash. But I’m not sure you would want to skip a home inspection unless you are familiar with inspecting homes yourself.
A friend of mine just recently sold his house to his co-worker. Luckily his co-worker decided to do an inspection to be safe. My friend thought that was weird since they were both familiar with the house.
But luckily (for the co-worker), they did because they discovered some foundational issues that neither of them had known about. It didn't stop the sale, but a good move for the co-worker to know in advance exactly what he was getting. Plus it gave the co-worker some extra negotiating power.
2. Loan Appraisal Cost
Average Cost: $350 - $650
If you are using a loan to finance your next home, you will have to order a Loan Appraisal after you have finished the negotiation process with the seller to ensure the price you are offering is fair.
This will typically be ordered by your lender and paid by you. (Unless otherwise negotiated with the seller).
Banks don’t want you to overpay for a home because it puts them more at risk if you cannot make your payments, and they have to take the house back and resell it to recoup the money they loaned you.
3. Homeowner’s Insurance
Average Cost: $1300 - $1700 per year
Before your lender lets you take out your mortgage, you’ll need to provide proof of homeowners insurance. Homeowner’s insurance will cover unexpected damages (such as a tree falling onto your house) and accidents that might take place on your property (such as someone falling in your kitchen, injuring themselves, and suing you).
The purpose of Homeowner’s insurance is to protect you and your lender from any damage or accident liability.
4. Closing Costs
Average Cost: 2-5% of loan cost
Closing costs are the fees you’ll have to pay to finalize the closing of your new house. The closing costs typically include application fees, lender fees, homeowners association fees, title fees, and anything else needed to finalize the deal.
Closing costs can typically be shared with the seller if your real estate agent can negotiate that into the deal.
According to a recent survey from Zillow, you’ll typically pay between 2% and 5% of the home's purchase price.
5. Moving Costs
Average Cost: $1,500-$3,000+
One thing is for sure: moving is not cheap. If you have a lot of stuff, you will typically have to rent a moving truck or hire movers.
Is your new home larger than your last? If so, you’ll likely have rooms to furnish that you didn’t have before.
Will you have appliances at the new home? In some cases, the sellers of the home will take an appliance or two with them to their new home. That means you’ll need to replace what they take.
6. Home Maintenance
Average Cost: “The 1% Rule”
Unlike when you rent, you will be responsible for all repairs as the owner of your new home. Depending on the age of your new home, those repairs could start to add up quickly.
The 1% rule of thumb is a guideline that states you should save 1% of your home’s purchase price for maintenance costs. The 1% rule is not a perfect measure for everyone. Your home’s age, condition, and location may require more or less.
7. Property Taxes
Average Cost: 1% per year
As the owner of your new home, you will be responsible for paying property taxes.
Property taxes vary state by state. Property taxes will always be around unless your local government decides to abolish property taxes for whatever reason (which is highly unlikely, of course).
In most states, property tax is calculated based on the assessed value of the property and the local tax rate. Often this payment is folded into your monthly mortgage bill.
8. Mortgage Insurance (PMI)
Average Cost: $30 - $70 per month for every $100,000 borrowed
If you put less than 20% towards a downpayment on your new home, you will typically be required to pay PMI (mortgage insurance) every month.
PMI is insurance that protects the lender in case you default on your loan.
So if you decide to take out a loan with a low down-payment, you will be seen as a higher risk to lenders and will typically be required to take on PMI.
Depending on the type of loan you use, PMI will typically fall off your mortgage payment after you officially own 20% of your home, either by continuing to pay off your mortgage or by your home’s value increasing in price.
Final Thoughts: Unexpected Homebuying Expenses
Just because you have the money to purchase a home doesn't necessarily mean you have the money to own a home and all that comes with it, year after year.
Buying a home is a great way to build additional wealth. However, make sure you’re aware of all of the costs involved with purchasing a home so that you don’t bite off more than you can chew.
The last place you want to end up is buying a home that you can’t actually afford.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #016
