Buying your first home is one accomplishment that not everyone is able to achieve.
After all, it takes a lot of hard work to save up for the down payment, perseverance to find the right property to purchase, and patience to go through the sale and documentation process.
What many homebuyers fail to realize, however, is that owning a home involves so much more.
For one, you need commitment to pay for the mortgage every month for many years and enough love for the structure to keep it in tip-top shape. These, among other things, can drain your finances unless you are properly prepared to face them.
Many new homeowners have made the mistake of not anticipating the costs, which eventually turns what could otherwise be a happy home into a worried, financially depleted one.
Expenses New Homeowners Face
Finally receiving the keys to your new house signals a new phase in your life – it gives you a sense of achievement and independence. In turn, you need to be responsible, especially with your finances.
Therefore, long before you shop for a house, even while you are still saving for the down payment, you should already include other expenses in the equation.
These expenses are not always brought up during discussions about house purchase so they may overwhelm you.
Here are some expenses that you should expect when you buy your first home:
Closing costs are fees that are incurred during the purchase and loan process, which you have to pay when the title is transferred to your name.
These often include: the application fee; the appraisal fee; the credit report; fees for the attorney, escrow, and courier; home inspection, flood determination, lead-based paint inspection, soil inspection, and/or pest inspection; recording fees; lender’s and owner’s policy title insurance; homeowners association transfer fees; among others.
In all, it could cost you somewhere between 2 to 5 percent of the purchase price.
If the lender agrees not to charge you the closing cost upfront, you may be tempted to agree, given the amount involved. The thing is, if this is included in the total mortgage you owe, then it would mean an addition to your monthly payments. Moreover, it will earn interest.
Let us just say that the property is worth $300,000 and you loan $250,000.
In 30 years at 4 percent interest, the total amount, bar other costs like property tax and home insurance, would be $429,673.77. If you add the closing costs of, say, 5 percent or $15,000 to the principal of $250,000, your total in 30 years would be $455,454.19.
While you might not feel the additional cost each month, which would just be a little over $70, you would actually be paying an interest of more than $10,000 for the closing cost alone.
It would be better to prepare to pay this upfront rather than shoulder the interest.
Many homebuyers have this notion that owning a home is like renting an apartment, only better – they pay for their housing every month but this time, the payments go toward their own property, not to their landlord.
It’s true – they are putting their funds on an investment rather than on an outright expense.
What many don’t anticipate are the additional costs like property taxes, something that they never had to worry about as a tenant.
Property tax is an obligation to the government and should be paid annually by property owners.
The amount of tax you would have to pay depends on the assessed value of your land along with any developments or improvements made.
Also, taxes in some areas are higher than in others, depending on the zone, but just to give you an idea, according to the U.S. Census Bureau, as reported by Wallet Hub, American households shell out an average of $2,127 per year on property taxes.
For new homeowners who are not prepared, this could become a burden. What you could do to ease the payment is to find out how much you need to pay in advance, then divide that amount by 12. This would allow you to include your property tax in your monthly budget.
Allot a bit more than the amount – the extra money would cushion you in case the taxes are bumped up, and you can save any leftover for next time.
Apart from taxes, you should also set aside money for a homeowner’s insurance, which is far more expensive than a renters insurance.
This would protect you in case something happens to your home. In any case, lenders require it until you have fully paid your mortgage.
The cost of insurance for your home may depend on risk factors. If the house is rather old and is at risk of falling apart, then you may have to pay more. If it’s located in an earthquake or flood zone, you may have to pay extra.
Some companies might even refuse to insure a house if a previous owner has filed a very expensive claim before.
Along with the down payment, the monthly mortgage is one factor that is discussed during the purchase and loan application process, so you undoubtedly know how much of your monthly income you would have to prepare for your obligation.
The thing is, you should be prepared enough not to miss any payment or you would suffer the repercussions.
First, you might have to pay penalties for late payments.
Second, your credit score will drop.
Third, it will be reflected on your credit history, which will stay there for many years. Fourth, if you go beyond the grace period, your account will be considered delinquent.
Fifth, if you reach 120 days without paying, your home could be considered for foreclosure.
Missing a second payment would not be good, either.
Therefore, even before you buy your first home, you should have enough funds not just for the down payment and miscellaneous expenses but also for backup in case something unforeseen happens, such as if you suddenly lose your job.
Your monthly mortgage should be included in your emergency fund. The amount in this fund should be equal or more than your necessary expenses for three to six months.
So if your monthly mortgage is $1,600, you should have from $4,800 to $9,600 set aside for housing, plus money for food, transportation, utilities, insurance payments, etc. You emergency fund should be separate from your savings and retirement funds.
Homeowners Association Fees
Depending on where your home is, you might be required to regularly pay a homeowners association fee.
Condominiums and gated communities, in particular, require this to cover the maintenance of the building or common areas, security, and so on.
This may cost from $200 to $400 per month, and if there are amenities like a swimming pool and elevators, it could be more.
You should find out the rate beforehand and include the amount when computing how much you have to set aside each month for your home.
If the association collects fees yearly, then divide the amount by 12. This way, come payment time, it won’t burn a hole in your pocket.
Repairs and Upgrades
If you are buying a previously owned house, then expect to spend for repairs, especially if you bought it “as is.” Leaky faucets might have to be replaced, a part of the roof may need to be reinforced, or the bannister on the stairs might need to be fixed.
The doors and windows may need to be resealed, the toilets replaced, or the front porch patched up.
The job can be especially taxing if, suddenly, you find that there are termites in the house or that rats live in the basement. You would need to hire a professional pest exterminator for this.
Similarly, you may want to do some cosmetic upgrades to your home, such as a change the color of the paint or a complete kitchen makeover. After all, you would want your new home to look fresh and inviting, not shabby and grim.
If you are a do-it-yourself person, then you might be able to save some money on labor, but some jobs cannot be done by one person alone. If you are not handy with tools, then you would need to hire professionals to do the job. This means expenses on both materials and labor.
Some home improvements, especially major ones, need permits before you can start them. You should check with the local government if the job you need to do would require a permit from them; otherwise, you might be penalized.
Also, any add-ons that you do, like a new shed or a kitchen extension, would jack up your taxes.
In other words, you need to prepare money to cover any repairs and upgrades you may want to do your home even before you move in.
If your new house is not equipped with outlets where you need them, then you may need to have electrical wiring done. While you can certainly use extension cords, you would need to make sure of the quality and the voltage.
Also, there are rules to using extension cords, as itemized on the National Electrical Code. For one thing, you cannot run it through holes in the ceiling, floor, or wall, or through windows and doors. Also, it cannot be used as a substitute for fixed wiring.
For example, if you are converting a bedroom into your study and there are no outlets close enough to plug your computer, printer, and other equipment, or if you have a lot of kitchen appliances, then you may need additional outlets.
Similarly, you would need wiring for your cable and Internet as well as for your landline, if you have or need one. The wiring outside would be the responsibility of the company, but you will have to be the one to handle the wiring indoors.
In other words, you may need to have wiring done to your house, so it would be good to have the budget for both the materials and the labor. According to Home Advisor, licensed electricians usually charge by the hour.
In addition, the amount you would pay depends on how complicated the job is.
Just to give you an idea, the website says that the average national cost for hiring an electrician is $322 while the average cost for upgrading an electrical panel costs $1,071.
Installation of electrical wiring or panel ranges from $125 to $4,000, with the average cost of $1,270. It costs $197 to have an outlet installed while installing a generator costs $3,297.
Before you move in to your new house, you may be thinking of having security systems installed, immediately or at a later time. The more urgent matter to handle, though, is to change the locks because you don’t know how many keys to your doors are out there.
The price would depend on the kind of locks you choose. There are mortise deadlocks, surface mounted deadbolts, cam locks, rim automatic dead latches, entry lock sets, among many others.
Moreover, it is not just the front door that you should think about – you should also change the locks on other openings, like the back door, the sliding door in the veranda, the side door, etc. Also, you would need to check the locks on the windows and see if any of them needs to fixed.
Apart from the locks, you might also need to hire a locksmith. Home Advisor reports that the average cost of hiring one is $151 but it can go as low as $50 and as high as $350.
Before you move in, you’d want to clean every nook and cranny, every cabinet and cupboard, every portion of your new home from the attic down to the basement.
If it is furnished, then you need to clean the refrigerator and stove, too. Deep cleaning is not just for aesthetics, it is also to get rid of dust, smells, and germs.
Good for you if the house is spick and span, but even then, make sure to clean the house before you move in.
Cleaning is much harder if you need to clean the chimney, get rid of grime on the kitchen and bathroom tiles, remove leaves and debris from the gutters, scrub the windows, and more.
If the house is rather big, you might need more than one day to get it done or you might want to hire a cleaning person to do it for you.
Whether you decide to do it yourself or get help, you would still need cleaning supplies and equipment like brooms, mops, rags, buckets, cleaning solutions for different surfaces, rubber gloves, and so on, so those are additional expense.
If you opt to have regular visits from the cleaning person, that, too, should be added to your budget. The charge is usually $100 or more per visit, so if it’s twice a month, you should set aside around $200 monthly for the service.
You’d also be needing your cleaning supplies throughout the year for many years, so expect to have to replace or replenish them every so often.
The outside of the house might also need some sprucing, so you would need to include your lawn in your budget. If you want to make it look manicured, then you would need funds for landscaping.
Even if you don’t want to hire a company to do this, you would still need gardening tools, plants, grass, a garden hose (or a bucket and watering can), among others. For a really huge lawn, you may even need a riding lawn mower.
Similarly, you would have to trim a tree whose branches are reaching out to the upstairs window or look too brittle to have your kids playing underneath.
As you probably already know, having a lawn is not a one-time job. Weeds have a way of creeping up on you, and if you don’t watch out, your garden will be overtaken by them. It needs regular maintenance so you should either have time to do it or money to have a gardener maintain it for you.
Surely, you are already familiar with paying bills, but if your new house is bigger than your apartment, then you should expect some of your utility usage to increase.
According to the Pew Research Center, homes are now more energy efficient than in the ‘70s but houses today are bigger in size, which offsets the efficiency gains.
For example, your central heating and cooling system will have to work harder to heat up or cool down a bigger space. A higher wattage or more bulbs are needed to light up a bigger room.
If you didn’t need to have a porch light lit all night before, then you might need it in your new house. This means your electricity bills are likely to be higher.
Similarly, if you have a lawn, then your water bill is likely to rise.
Keeping your home well-maintained is very important because, one, it’s for your and your family’s safety, and two, it keeps the value of your home from dropping dramatically.
Moreover, a well-maintained house is more pleasant to live in, and you will feel more secured knowing that there’s no safety hazard. However, expect maintenance to cost you.
For example, if an electric wire needs to be fixed, there will no longer be a landlord to take care of it. You will have to replace the bulbs, fix leaky pipes, make sure the furnace is working, reseal the windows, fix the roof, and so on.
Similarly, you need to get rid of pests, keep your lawn trimmed, fix appliances, and more.
The thing is, maintenance is an ongoing process – you need to solve an issue before it becomes a problem. You also have to be prepared for unforeseen circumstances, like a tree falling on your garage roof. Having amenities like a swimming pool will require regular attention, too.
Simply put, you need to have funds for maintenance and emergency repairs.
Another thing that new homeowners should anticipate is the cost of moving. The amount depends on how far and how much you have to move. You should take the time to find and screen several moving companies before you decide on hiring one.
Check for the company’s authenticity as well as any commendations or complaints they have received from other customers.
Furnishings and Household Items
One thing that you should expect as a new homeowner is that you seem to need more and more things.
If you have a lawn, for instance, then you might realize that you don’t have a hose or a pair of gloves. You might need blinds or curtains because you now have more, bigger windows. If you have a garage, then you might decide that it’s time to have those power tools that you have long wanted.
The thing is, seemingly small things that you need and want can accumulate and, before you know it, have put a dent in your wallet.
Early on, it’s best to have a list of the things that you anticipate you would need once you buy your house. This way, you can save for them and prioritize. Some extra money set aside wouldn’t hurt either, just so you don’t depend on your credit card when you have to buy necessities.
Personal Finance Tips for New Homeowners
Buying your first home is an exciting stage in your life and, exciting as it is, you might get careless or carried away with your spending.
Many who have gone through the same phase have committed the mistake of wasting their funds on things that they later wish they didn’t, and you wouldn’t want to have to experience the same thing.
Additionally, you would want to start good finance habits so you feel more secured. Here are money tips that you can consider as a new homeowner:
Once you have a place that’s bigger than your apartment, then you may find that your stuff is not enough to fill the space or that your old things don’t suit your new home.
You might decide to get new, more expensive furnishings that would match your living room or new mirrors to place in the bathroom. The carpets or wallpaper may not be to your taste, or you think that a new cooking range is better for the kitchen.
A lot of new homeowners have made the mistake of splurging on beautifying their new home before or as soon as they move in. These are usually huge expenses so unless you have the budget for this, it could deplete your remaining funds.
It would be better to take it slowly, letting your new home grow with you and evolve as time goes by. You can change it a little at a time or save enough to make a big change.
The important thing is, to recover your funds first after spending on the down payment and other expenses.
Another money mistake that new homeowners make is not shopping around for insurance. Do not settle for the first one that you find. Look around, ask questions, and find the best deal. Remember, however, that the best deal is not always the one with the cheapest premium. You should be clear on what the insurance covers. As they say, always read the small print.
You should familiarize yourself with the basic homeowners coverage. Do a background check on the company, visit their website to get a sample rate, and consider bundled plans.
If you want to lower your insurance premiums, then you might want to install smoke detectors, burglar alarms, and find other ways to minimize the risk.
Additionally, there are appliance or home warranty insurance plans out there as protection in case your appliance gets ruined.
You can consider this if you think this is right for you, but if you think that you would not really need regular repairs, then you might as well as save the amount that you would otherwise pay for the premium and use it to cover for occasional repairs.
According to Home Warranty Reviews, the annual premium for home warranty insurance ranges from $500 to $1,000.
You should consider making your new home energy efficient, such as using Energy Star-approved bulbs, air sealing your home, having insulators, and so on. These will save you a lot of money in the long run.
In addition, it’s time to practice some energy-saving habits, like unplugging appliances and turning off lights that are not in use, hanging your clothes to dry instead of using a dryer, and lowering the water heater when it’s not cold.
You can also plant a shade tree to block direct sunlight from going into your home, using fans rather air conditioners, and replacing air filters.
Records and Budget
Financial experts have, time and again, advised people to have a budget. If you have not started on this yet, then this is the moment to do so.
Once you become (or now that you are a homeowner), this becomes even more important because of the expenses involved.
If you are already keeping a budget, then expect to make adjustments because your finances will have a big change from when you were a tenant. You cannot just replace your rent for mortgage and your renters insurance for homeowners insurance.
You need to add the other expenses mentioned above, such as property taxes, maintenance costs, and so on.
Also, you should make a habit of keeping receipts and records of everything, especially for any improvements you do in the house. All documents must be organized and kept in a safe place. If you decide to sell your house later on, the improvements would help increase its value.
If you are not accountant, then you might need some help in filing your taxes.
Although hiring a professional would mean additional expenses, getting your records right could also mean getting more refund. For example, if you installed solar panels, then you may be eligible for some tax credits.
This is especially important for new homeowners because your tax situation will be different from when you did not yet own a property.
Also, when you get an home assessment, make it a habit to check for errors. Question any discrepancy and have them corrected.
New homeowners face a lot of financial challenges, so it’s important to be prepared for them.
If you are still in the process of planning to buy your first home, then you should make sure that you have enough funds for the expenses ahead.
If you have already bought one, then you may want to consider controlling your spending and make a budget to avoid feeling stressed in your new home.