You’re hoping to buy your very first house. You’ve saved up and you’re confident that you have enough to put down a substantial down payment, and your current income is high enough to get you approved for a mortgage loan. You feel like you’re ready to explore your local real estate market and find the best listings.
Before you do that, you should consider some of the expenses that come with buying a house. You’re going to have to cover more than a down payment and a mortgage loan. These are just some of the expenses you might encounter with your real estate purchase.
Homeowners insurance (sometimes called “home insurance”) is an insurance policy that’s meant to provide financial coverage when your property is damaged. So, if a burglar breaks into your house, your insurance can help you repair broken doors and replace lost possessions. Homeowners insurance can also offer personal liability coverage, which will come in handy if someone gets injured on your property and involves you in a lawsuit.
You cannot opt out of homeowners insurance. Mortgage companies require that borrowers sign up for this type of insurance coverage. Expect to pay approximately $1500 per year on policy premiums.
In addition to homeowners’ insurance, you might have to pay mortgage insurance. Mortgage insurance is meant to protect the lender in case the borrower defaults on mortgage payments. So, this policy is not meant to provide you with any financial protections.
Lenders usually require borrowers to sign up for mortgage insurance when they don’t have a large enough down payment. The insurance plan is supposed to compensate for the lower down payment. Some types of home loan programs, like the USDA home loan program, require users to sign up for mortgage insurance.
Typically, you will have to continue to pay mortgage insurance fees until you reach 20% equity in your house. After you reach that percentage, you can request to have the fees canceled from that point forward. This can take years.
The moment you become a homeowner; you will have to pay property taxes. Property taxes are used by your local government to fund public roads, schools and essential services like fire departments. The amount that you must pay in property taxes will vary by state and county. Maine, Vermont and New Hampshire are just some of the states with the highest property taxes. Do some research to see what you can expect to pay per year.
When you’re finalizing your purchase of a house, you have to pay “closing costs.” These are a collection of fees and taxes, like attorney’s fees, courier fees and land transfer taxes. Altogether, you likely pay between 2-5% of the property’s price in closing costs.
Are you joining a homeowner’s association (HOA)? If you are, you will have to pay HOA dues. HOA dues are monthly payments that are supposed to support the HOA’s community. Those dues can be put towards services like household repairs, snow removal and landscaping. They can also be used for maintaining community spaces like pools, tennis courts, parks and fitness centers.
HOA dues are typically $200 to $300 per month, but they can be much more expensive.
You should set up an emergency fund before you sign the dotted line for a house. Why? Houses will come with all sorts of surprise expenses — and some of these surprise expenses will be emergencies, like sudden plumbing repairs, HVAC maintenance and pest control services. You’ll want to be ready to handle these expenses at the drop of a hat.
Without an emergency fund, you might not have enough money readily available to cover a surprise repair out of the blue. In that case, you’ll have to turn to a different payment solution. You could charge the surprise repair to your credit card and then pay down the balance afterward. Or you could consider applying for a loan by phone and using the borrowed funds to cover the repair costs. After using the borrowed funds, you could focus on a loan repayment plan. All you would have to do is make payments through a straightforward billing cycle. Over time, you’ll repay the personal loan and recover from the emergency altogether.
An emergency fund isn’t the only step you can take to protect yourself from surprise repairs. Before purchasing a home, arrange for a home inspection. A home inspection should let you know whether there are any repairs or maintenance services that need to be made from the moment you get the keys. Do not purchase a property “as is,” unless you’re comfortable paying for surprise repairs or major renovations.
These extra costs will add up! Budget for them before you put an offer on a house.