01/09/2022
Budgeting for Your First Home? Know These Hidden Costs of Buying and Owning
Tallying all the costs involved in home ownership can give you a true picture of affordability.
The best time to get a sense of the costs involved in home ownership is before you begin to look for one.
While most prospective buyers are familiar with big ticket items such as mortgage payments and property taxes, smaller costs such as homeowner’s insurance, utility bills and repairs also add to the cost of owning a home. Taking them into account before you begin shopping can help prevent unpleasant surprises that drain your finances.
Here are some common “hidden costs” you might run into, and some ways you could prepare for them.
Home repairs and cosmetic updates
Depending on the age and condition of the home, you’re likely to run into things you want to update or have to fix.
Research and survey data from Zillow and Thumbtack, a home services website, shows that 65% of active shoppers are not looking for a fixer-upper. Yet the research found that the typical for-sale home could need nearly $30,000 worth of work, and that new homeowners should expect to spend $26,900 to make their new home move-in ready.
That’s substantially more than the $10,000 to $15,000 the average millennial surveyed by Thumbtack expects to pay for repairs and updates.
The most expensive project — evaluating, repairing or replacing heating and air conditioning systems — clocked in at a national average of $3,615.
New appliances
Everything in a home has a lifespan, and appliances are no exception.
If you’re buying a newly built home, the appliances should be new and under warranty. If you’re buying a resale home, the need to replace or repair an appliance can vary widely depending on the age and condition of the appliances.
At a minimum, most appliances will run you several hundreds of dollars for the most basic models. Add bells and whistles, and you could be looking at thousands of dollars to replace a refrigerator. You also could have to pay for installation, a pricey proposition if it involves changes to electrical wiring or plumbing.
Utility bills
If you’re a first-time buyer, the cost of utilities could surprise you, especially if your previous rental home included utilities.
For people in urban areas, utilities could include:
Water and sewer
Garbage pickup
Electric
Natural gas
Cable
Internet
Rural utility costs could include:
Water
Septic repair and maintenance
Garbage pickup
Electric
Propane
Wood or wood pellets for heat
Internet
Larger homes are likely to cost more to heat and cool, and older homes may be less energy efficient unless they’ve had new windows installed and/or the insulation upgraded.
Homeowners’ insurance
The cost of homeowners’ insurance will vary depending on your location, the type of coverage you’re buying and any discounts you might qualify for, and your insurer.
Broadly speaking, you can expect to pay about $35 a month for every $100,000 in home value. For instance, if your home is valued at $300,000, you’ll be paying about $105 a month for basic coverage. The cost is likely to be higher in areas prone to hazards.
Coverage for rebuilding or repairs after an earthquake or flood is usually not included in standard homeowners’ policies, so you may want to — or in the case of flood insurance, have to — buy a separate policy.
If you’re buying with a mortgage, the lender will typically roll the cost of insurance into the monthly mortgage payment and pay the premiums on your behalf.
Homeowner association fees
Homeowner associations or HOAs are non-profit entities that can establish and enforce rules, provide basic services such as water and tend to the maintenance and repair of community amenities such as pools, roads and landscaping.
Commonly found in condominium, townhome and planned single-family home communities, HOAs are run by a board of homeowners and typically charge dues that you will be required to pay monthly or annually.
Dues vary widely, and can change depending on the community needs. For instance, an association that has neglected maintenance or wants to undertake development of something such as a new park can raise dues or levy special assessments.
How to prepare for hidden costs
A good place to start is to determine how much you intend to put down on the purchase, and then see how much you’re prepared to spend on closing costs and improvements. A good rule of thumb is to have 1-4% of the home cost reserved for hidden costs.
Look to your home inspection for a preview of what to expect. The best way to get a handle on possible costs for repairs and upgrades is to have a home inspected before you make an offer to buy it. A good inspector can assess electrical systems and plumbing, structural soundness and the condition of the roof — and some inspectors can offer price estimates for various repairs. Even seemingly small repairs add up, so knowing what your house may need in advance can help set expectations for your wallet.
Once you have a handle on what repairs are needed, you can factor the into the cost of the house to determine the true cost of owning it, and compare the price to other homes that might not need as much work.
Plan for updates and repairs. Think about what things would have to be done immediately, what could wait, and — if you’re handy, what you might be able to do yourself. Be realistic. Some home projects, such as painting the outside or remodeling the kitchen, can take a long time when you’re working and/or tending to your family.
Get to know your appliances. You also should ask your inspector to test the appliances during the home inspection, and ask your real estate agent to get the age of the appliances from the seller, along with typical cost of utilities in the summer and winter months.
Research home warranties. A home warranty — which is a short-term service contract that helps home buyers cover the costs of repairing or replacing certain mechanical systems and applies during the first year of ownership, can take away some of the financial uncertainty. Depending on the level of coverage, home warranties typically cost between $300 and $800, and can usually be paid monthly or in a lump sum. You can ask the seller to pay for one or buy one yourself.
Factor in HOAs. Since HOA dues are fixed for the year, they should be easy enough to figure into the budget. To get a sense of how stable those costs are likely to be long term, ask for a copy of the HOA’s most recent three annual financial reports to see whether it is spending money on routine maintenance. HOAs that kick the can down the road can end up with expensive projects that require special assessments or hefty dues hikes.
Add up costs for maintenance. If you’re contemplating a home with a yard, do a cold-eyed assessment of how much time and money you need and want to spend maintaining it. If you don’t want to buy lawn tools or prefer to hire someone to do it, put that in your budget.
Remember: Your list doesn’t have to be exhaustive, but it should get you close to what you’re prepared to spend. Having that monthly cost in mind, can help you determine whether the home you want to buy fits your budget.
