The decision to buy a home depends on many factors, most important of which are related to finances. There are many homeownership benefits such as home equity, appreciation, and tax deductions. But do you know the risks and hidden costs of homeownership?
Buying a home is one of the largest financial obligations you’ll ever make. The biggest risk is the risk of default – when you fail to make payments on your home. Other risks include your home becoming obsolete in the market and uncovered disasters in your homeowner’s policy.
Becoming a homeowner is a big step in life. According to Freddie Mac, homeownership means “that home is a place to call your own, raise a family, build memories with friends, and become a part of strong neighborhoods and communities. It also means meeting personal financial goals and investing in the future.”
Owning a home is more than just a mortgage payment. You’re solely responsible for upfront costs, regular maintenance costs, and hidden costs. Here’s a breakdown of the top 10 expenses of homeownership.
10 Expenses of Being a Home Owner
Here is a list of 10 common costs of homeownership so you can plan your new home budget.
1. Mortgage Payment
Mortgage payments start once you officially own the property. These types of payments are very straight forward. You pay a monthly portion of your home loan, until it’s completely paid off, interest included. To get a better idea of what your mortgage payment will be based on your quote, check out our mortgage calculator to get an accurate estimate in minutes.
If you have an escrow account, your monthly mortgage will include payments toward your principal balance, interest, property taxes, and homeowner’s insurance. Depending on the type of mortgage loan, you also may pay for mortgage insurance as part of your monthly costs. Federal Housing Administration (FHA) loans typically require mortgage insurance, but Veterans Administration (VA) and some conventional loans do not.
Some mortgage loans have more advantages than others depending on your unique situation.
To find out which loan is best for you, check out our guide to all the different types of mortgages.
2. Property Taxes
Property taxes are a big expense that’s typically included in your mortgage payment. However, when you calculate a mortgage online, this information may not be included. To find you property tax payment, find out what the taxes are on the home (listed on MLS), divide it by 12 (total payments in a year), and add it to your monthly payment. As a friendly reminder, property tax increases annually around the first of each year– meaning your monthly payment with increase as well.
3. Homeowners Insurance
Homeowners Insurance is a lot different than renter’s insurance. There are many factors that affect how much your homeowners insurance will cost. Things like when your home was built and the location of your home. Is your home located in a flood zone? What about an earthquake or tsunami zone?
Homeowners insurance is more expensive when there is a greater risk of you actually using it. If you’re purchasing an older home that is more prone to problems, your rates will be higher than that of a newer home.
Insurance companies use credit based insurance scores to determine how likely you are to file an insurance claim. The higher the risk for the insurance company to take on, the more your premium will cost.
4. Mortgage Insurance
Mortgage insurance allows you to pay a lower down payment and still qualify for a home loan. What mortgage insurance does is protect the lender if you default on the loan.
However, mortgage insurance is not always required. Mortgage insurance is only required if you get an FHA loan or put down less than 20% on a conventional loan. The cost of mortgage insurance can be added onto your monthly payment or closings costs.
Sometimes you can avoid paying mortgage insurance through first time home buyer programs, but for the most part you’ll need to get a conventional loan and put down at 20% to avoid it.
Make sure to factor mortgage insurance into your monthly expenses if it is required.
5. Escrow Prepaids
When it comes to mortgage loans, there are several different types of prepaid items. Some of the most common are:
- Homeowners insurance premium paid up front as well as into an escrow account
- Real estate property taxes paid into an escrow account
- Mortgage interest (also known as per diem interest) that accrues between the closing date and month-end
If you’re uncertain if something is a “prepaid” item, ask yourself if it is a charge that you would have if you weren’t borrowing money to buy a home. If the answer is yes, then consider it a prepaid item.
6. Mortgage Points & Credits
Points on your mortgage lower the interest rate over the lifespan of your loan but increase the down payment for your home. Lender credits decrease the amount needed to put down on a home but increase the interest rate on the loan.
A significant way you can move the interest rate lower or higher is by comparing mortgage points vs credits.
You can calculate the effect points and credits will have on our loan using our mortgage points calculator.
7. Closing Costs
Closing costs typically cost between 2-5% of the purchase price of your home. This is the last step in the mortgage process and it’s an upfront fee that you pay at closing. These costs include:
- Mortgage interest
- Attorney fees
- Lender application fees
- Recording fees
- Tax and insurance escrow payments
- Title insurance
And possibly more fees depending on your unique mortgage situation.
Utilities are upfront and recurring costs. You have to pay for everything to be turned-on and switched to your name, then you must keep up the monthly payments. Depending on the area in which you live, utility costs can be as high as property taxes. The average cost of utilities in the United States is about $400 per month.
9. HOA Dues
If you buy a home with a community pool, clubhouse, even sidewalks – then you’re going to be hit with a homeowners’ association (HOA) fee. This means you’ll be required to pay a monthly or quarterly fee, depending on the community. It also means that a community of people can tell you how often to cut your lawn and what color you can or cannot paint your home.
This charge generally covers costs for services that benefit the entire neighborhood – garbage collection, security camera installment, or repaving or neighborhood roads.
10. Regular Maintenance
There are many regular maintenance tasks that are included in homeownership:
- Yard work (landscaping, watering, mowing)
- Cleaning the interior and exterior (gutters, dryer vents, pressure washing)
- Maintaining the HVAC system (changing air filters regularly)
- Maintaining appliances (dishwasher, fridge, stove, washer, and dryer)
- Pest control, treatment, and prevention
Most home advisors recommend the 1% rule. Saving 1% of your home’s value for regular maintenance.
Mortgage Loan Process for Home Buyers
A well-educated buyer is the most successful buyer. Now that you’re aware of the top 10 hidden costs of home ownership, you need to become familiar with the mortgage loan process timeline.
- What are the steps in the mortgage process?
- What happens during mortgage loan processing?
From application to closing, the mortgage process has several steps that all happen in major phases.
Step 1: Application
In the Application phase, you begin with your pre-prequalification, pre-processing, and loan application. At Loan Compass, we call this Prepare. Learning the essential loan information (in its simplest form) before negotiating with various lenders.
Step 2: Shopping
This is where you find a real estate agent, begin touring homes, and make an offer on a home. We have a Shop and Find option to make it easy to receive quotes, analyze quotes, and obtain pre-approval letters.
Step 3: Assessment
Phase 3 of the mortgage process is Inspections. Once your home is under contract, you must move forward with the appraisal, septic and well inspection, termite inspection, and foundation inspection. Depending on the type of loan you receive, you may be required to conduct more in-depth inspections.
Step 4: Underwriting
This process involves comparing your (the borrower’s) application, credit report, and documentation to loan program guidelines.
Step 5: Closing
The final phase, the one you strive to achieve, is Closing. The final close documents are signed by all parties, funds are transferred, and the final paperwork is sent back to your lender.
The entire mortgage loan process takes approximately 45 days.
Buying a home is one of the most self-satisfying and rewarding purchases you can make. First-time buyers are often shocked at the risks and hidden costs associated with homeownership but arming yourself with the information listed above will prepare you for the unexpected.
At Loan Compass, our goal is to provide simple directions to successfully navigate the home loan process. Through our 5 simple steps, you will arm yourself with important knowledge and tools to save you money on your home loan. Speak with an experienced loan officer to find out your true cost of homeownership.