The Hidden Costs of Homeownership

Every new homeowner expects to pay their mortgage each month, but then, zoinks! In comes a bill from the homeowners association (HOA). Ruh-roh. And what about those fees you paid to your lender at the closing table? They might’ve been called “closing costs?” Where did those come from anyway?

When buying a home, many prospective homeowners don’t factor in the upfront fees required to earn the keys to their new place. Beyond the monthly mortgage payment, there are a few other “out of sight” expenses to owning a home. So come, dear reader, the game is afoot. It’s time to solve the mystery of homeownership’s hidden costs.  

Closing Costs and Prepaids 

After submitting your application, you’ll receive a Loan Estimate, which will probably mention settlement costs, also known as closing costs, and prepaids. Come again?

Closing costs are fees for the services performed throughout the loan process that borrowers must reimburse before closing. Although your property's location plays a factor in the range, typically, closing costs shake out to around 2-6% of your home’s purchase price. Examples of closing costs include appraisal fees, title searches, and credit report charges.  

Similarly, prepaids are reimbursed to your lender before closing and put into an escrow account to pay taxes and insurance in advance (more on that later). Think of prepaids as money paid upfront to cover taxes, interest, and insurance costs during the gap between when you close and when you make your first mortgage payment. 

Expert Tip

Before you buy, speak with your lender to get an estimate of your closing cost or prepaid fees.

Property Taxes  

While you’ll technically pay closing costs and prepaid fees before the home is in your name, property taxes are one of the first expenses you’ll see as a full-fledged homeowner. Almost all property, such as land, buildings, or houses, is subject to a property tax. Percentages vary by county or city, but in short, property taxes help local governments fund education, emergency services, transportation, parks, libraries, and other recreational activities.  

Homeowners can lump their property tax into their monthly mortgage payment, and some may be eligible for a “homestead exemption,” allowing them to shelter some of their property value from tax assessment. Speak with your local tax assessor’s office to see if you’re eligible for a homestead exemption. 

Homeowners Insurance 

Not only does homeowners insurance protect your house from a structural standpoint, but it also covers the personal property within your home. On top of that, it can cover any liabilities. For example... 

If something catastrophic does happen to your home, homeowners insurance can also protect your lender and their interest in the property. Your mortgage is your lender’s investment in your home. In the event of a disaster, where your home was destroyed, your mortgage would have no value. Your lender requires you to have insurance so that, at a minimum, it’s possible to cover the cost of rebuilding the house entirely. 

How much you’ll pay in homeowners insurance depends on many factors, such as your home’s assessed value, how much coverage you need, the deductible, the type of coverage you need, and the claims history in your area (just to name a few). 

HOA Fees 

As mentioned up top, HOA fees exist to manage, insure, sell, and market homes in condo buildings, townhomes, and specific neighborhoods or subdivisions. So when you start your homebuying process, it's vital to keep HOAs in mind, as they can significantly impact your immediate finances and lifestyle. Your lender should be able to factor those costs into your estimate beforehand.

HOA fees are often seen as an addition to your monthly payment and are a "quality-of-life insurance" for the upkeep of the common areas in your building or community.

Once again, the amount you'll pay in HOA fees depends on location and the type of home you purchase. 

Maintenance and Utilities 

Simply owning a home is one thing, but keeping up with its needs and ensuring it’s running in tip-top shape is an entirely different matter. Every homeowner wants to keep their home’s interior and exterior clean and functioning at a high level, but that’ll take some extra effort on the TLC front.

Performing regular maintenance on a home, whether it be cleaning, replacing, mowing, mulching, shoveling, pressure-washing, pest controlling, or landscaping, can take a toll on your wallet. And if you put off, say, cleaning your gutters for a few months or filling in that crack in the driveway, minor repairs can turn into major repairs in a heartbeat.

And the same can be said for your home’s utilities. Electricity, gas, water, sewer, internet, cable, and so on. Some of those services may have been included in your rent previously, but now as a homeowner, you’re expected to pay for the ever-mounting list of utilities.

But that’s where making a healthy budget comes in. We’ve previously stated that crafting a well-kept budget is the key to keeping more money around and staying on target for your biggest spending goals. However, a good budget can also help you gather the funds you need to skillfully funnel them into your maintenance and utility costs.  

Emergency Fund 

Setting up and making regular contributions to an emergency, or “rainy day,” fund isn’t a bad idea, especially for newer homeowners. You never know when a leak will spring in your plumbing or your air conditioning unit will malfunction on a hot summer day. Put aside a little cash each month to build a well of funds you can draw from to keep you out of debt or from overcharging credit cards when the unexpected occurs.  

Time 

Don’t forget about this one last secret cost – time! We all have it, but we can never get enough of it. Making the switch from renting to owning might be a strange transition at first, as many new owners are surprised by how time-consuming maintaining a home and lawn can be. But trust us – homeownership is just better.

Homeownership may come with the hidden costs above, but the “risk” is worth the reward. Start your homebuying journey off on the right foot – contact us today!