The Hidden Fees of Homeownership – 4 Things to Know Before You Buy

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Millennial homeownership is lower than what it has been for other generations of 25 to 34 year-olds. About one in three Millennials under age 35 own a home, according to the U.S. Census Bureau. While many factors may contribute to that statistic, one may be fear of homeownership.

Nearly two thirds of Millennials say they have regrets about buying their home. The main reason for that regret is the “hidden” costs of homeownership that Millennial homeowners feel surprised by after purchase. The best way to avoid such an unpleasant surprise is by gaining a full picture of your finances and understanding what buying a home truly costs.

Before Finding Hidden Homeownership Fees, Get a Full Financial Picture

If you want to avoid homeowner’s remorse, you must do more than compare your rent payment to your potential mortgage. You need to know that you can afford to buy and own a home.

Most first-time homebuyers consider only the purchase price of the house they want to buy. While many save for a down payment, the financial assessment stops there. Before you hit the pavement with your realtor, make sure you’re financially ready for the move. Start by answering these questions:

  • Do I have enough of a down payment saved? (Most experts recommend saving at least 20% of the purchase price.)
  • Are rates good? (Check rates with multiple lenders to get the best interest rate.)
  • Is there another move in your future? (If you are planning a move to another city or state within the next three years, it may be best to wait.)
  • Have I accurately assessed all the costs of homeownership? (Not sure what they are? We cover the top four below).

If you have a good down payment saved and aren’t planning to move soon, it’s time to consider the full financial picture of home ownership. Here are the top costs that homeowners tend to overlook and how to avoid them, so that you can purchase your home with confidence.

4 Hidden Costs of Homeownership to Consider Before You Buy

There are both one-time and ongoing costs that accompany buying a house. Planning for them before you sign on the dotted line will give you confidence that you’re making a wise decision.

#1 – Closing Costs and Other One-Time Costs You Might Have Overlooked

One-time costs are ones you’ll never recoup, but which you need to get into the home of your dreams. These one-time costs include:

  • Down payment
  • Home inspection fee
  • Initial repair costs (to fix things that may be uncovered during the home inspection)
  • Moving costs

There’s also closing costs, which can be significant. Some first-time homebuyers may errantly assume that the seller will cover their closing costs. While this does happen, whether or not it happens in your situation depends on a variety of factors including the local housing market and the seller’s timing, motivation, and financial circumstances.

Closing costs average 2% to 5% of the purchase price of your home and may include the following fees:

  • Realtor commissions
  • Attorney fees
  • Title search and insurance fee
  • Lender costs and fees

Some lender fees can be negotiated, but others are completely out of your control. If you’re looking at a house that costs $300,000, earmark at least $6,000 for closing costs.

#2 – Property Taxes

Property taxes are one of the hidden costs of home ownership that are easy for first-time homebuyers to overlook. Property taxes will figure into your mortgage payment and come on top of the purchase price of your home.

Taxes vary by city and county and can dramatically affect your mortgage payment for years. Local governments calculate and assess them. They are typically based on the assessed value of your home, which is another event that will happen during your home buying process.

How much you will pay in property tax depends on the value of your house and the land on which it sits. Property taxes are figured into your monthly house payment and unlike the purchase price of your home, can change from year to year.

After you pay off your mortgage, you will continue to pay property taxes on your home, so keep that in mind as you consider the purchase price that you can realistically afford.

#3 – Home Insurance

Like driving a car, you are required to purchase homeowners insurance. Unlike car purchases however, you can’t get a home loan without it.

This is an ongoing annual fee that you’ll have to pay as a homeowner, and should factor in to the overall cost of homeownership.

Insurance companies calculate your home insurance premiums on a number of risk factors that include:

  • The location of your home (a house in a densely populated city carries more risk than a less populated area and will therefore carry a higher insurance premium)
  • The size and age of your home
  • The condition of your roof
  • The cost to rebuild your home if it is destroyed
  • Liability protection in the event that someone is injured on your property
  • Your credit score

You have options when it comes to who you choose as your insurance carrier. Shop around, look for discounts and have discussions with insurers beforehand about potential premiums on the type of house you want to buy before you actually purchase it.

#4 – Annual Maintenance and HOA Fees

A final hidden cost of homeownership are the ongoing maintenance costs associated with owning a home. If you rent, you’re your landlord assumes the costs to maintain your apartment, which can include:

  • Landscaping costs (sprinkler system, mowing, snow removal)
  • HVAC costs (water heater, furnace, air conditioner upkeep and replacement)
  • Roofing, siding, downspouts and other structural issues

It’s wise to plan on spending 1% to 3% of the purchase price of your home per year to maintain it properly. While no one can force you to spend money maintaining your home, you’ll have a harder time selling a house you let go downhill.

If you purchase an older home, plan on potentially spending more to maintain it, especially if it is in a historic neighborhood or district.

How to Plan for the Hidden Costs of Homeownership

Now that you have a better idea of the true cost of homeownership, you can’t be surprised by it. Assess whether or not you are currently in a sound financial place to purchase your first home.

Can you afford all of these costs?

If not, stop looking and save up for these costs before purchasing your home. If moving now is a priority, consider buying a cheaper home. Look at the long game and consider buying small and trading up to get the house you ultimately want.

Going into the home buying process aware of all the costs will help you avoid the predicament so many Millennials find themselves in – remorse.

About Bryan Dornan

Bryan Dornan is Chief Editor of Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. Should you have any questions about articles like this, let him know.