When buying a home for the first time, most people think about the purchase price and mortgage payment. Focusing on the mortgage payment is normal, but owning a home includes a range of hidden costs that can significantly impact a buyer’s budget.
These expenses often catch first-time home buyers by surprise, which can lead to financial stress if you aren’t expecting the costs or don’t have a plan to pay for these expenses.
First, we have the costs of purchasing a home. Even if you use a loan product with no down payment required such as a VA Loan, you’ll still need to pay closing costs. These include loan origination fees, title insurance, appraisal fees, and more.
Closing costs may be two to five percent of the home’s purchase price. You may have some assistance from the seller, but typically you’ll pay these costs at closing. Another possible option is to add these costs into your loan, but this means you’ll be paying interest on the closing costs for the length of the loan, increasing your loan payment each month.
Once you start paying your mortgage payment, you’ll pay more than the principal and interest on the loan balance. Each month, a portion of your mortgage payment is for an “escrow account,” which is a special account that is used to pay the specified expenses when they are due. This includes property taxes, homeowners' insurance, and possible homeowner’s association fees.
You can reasonably expect these escrowed costs to increase each year. This means that, while the principal and interest portion of your loan payment will stay the same if you have a fixed rate loan, your total payment will go up each year to cover the increased expenses.
Property taxes vary depending on the location and the assessed value of the home. These are typically paid annually or semi-annually. You can find out what the sellers were paying for property taxes, and then ask how taxes are adjusted in that location.
Sometimes, a sale triggers an increase in taxes for the new owners. You want to have realistic expectations about what your taxes will be. In many areas, the sellers will have lower taxes compared to what the buyers will pay. Taxes also increase as the value of the home increases, and if there are changes to the tax rate.
Homeowners insurance is another necessary expense that can vary widely depending on the location, size, and condition of the home. If you have a mortgage, you're likely required to have homeowners insurance with adequate coverage to protect the lender’s investment in your property.
Homeowners insurance costs have increased recently due to the surge in natural disasters like floods, earthquakes, and hurricanes. And if you’re in a location prone to such weather concerns, you may need additional policies to cover specific damages.
Once you move in, buying a home means that you’re responsible for 100% of repairs and maintenance. This includes regular maintenance, such as HVAC servicing, gutter cleaning, and pest control. Then you’ll need to fix anything that breaks, including light fixtures, outlets not working, and plumbing problems.
Appliances typically last 8 to 15 years, and an average house has 8-12 appliances, so you’ll be replacing approximately one appliance every year. Experts recommend setting aside at least 1-3% of the home’s value annually for maintenance, though older homes may require more.
Finally, you’ll pay when you sell the property. The average cost to sell a home in the United States is 11% of the selling price. This includes preparing the home for sale, realtors' fees, closing costs, and any associated taxes on the transfer of ownership. You might even choose to pay a portion of the buyers' closing costs in order to get a sale.
Buying a home for the first time involves more than securing a mortgage and making monthly payments. Hidden costs such as property taxes, insurance, maintenance, utilities, and closing fees all contribute to the true cost of homeownership.
Understanding and preparing for these expenses can help first-time buyers make informed decisions and avoid financial strain.