In recent years, median home prices in the US soared to nearly $400,000.
However, the upfront cost of buying a house can be misleading. The price tag is only a fraction of what you pay overall.
Buying a home comes with numerous expenses outside the purchase price. Make sure you budget for the hidden cost of buying a home when deciding how much house you can afford.
Hidden Cost of Buying a Home
The hidden cost of buying a home includes everything outside the price tag. Most people are prepared for some of these costs, like closing costs, inspections, and property taxes, but some can sneak up on you.
Consider all the hidden expenses of buying a home so you don’t get stuck with a surprise bill you can’t afford!
Hidden Costs of Buying a House During the Purchasing Process
The first hidden costs appear during the purchasing process. Here’s what you may have to pay upfront when buying a house.
Earnest Money
You’ve put in an offer on your dream home, and they accepted!
First-time buyers may be shocked to find they have to put money down. Earnest money is a small deposit buyers make to escrow to show they’re serious about the deal.
Earnest money deposits typically depend on the purchase price and offer details, but you should expect to pay between $1000-5000.
The good news is your earnest money will contribute to closing costs when the deal closes. The bad news is if you back out of a sale after the initial due diligence period, the seller gets to keep the earnest money.
Warranty
Consider purchasing a home warranty at closing unless you are buying a brand-new home that already includes one.
Warranties cover plumbing, electrical, appliances, and anything that goes wrong with the house for the first year. It offers peace of mind and protects you from paying thousands of dollars in costly repairs for things that break immediately after closing.
In a buyer’s market, the seller may agree to pay for a warranty at closing. However, you can renew the warranty every year after purchase, making it an additional cost of homeownership that offers lasting peace of mind.
Homeowners Insurance
Homeowner’s insurance is a must-have when financing a home. Usually, your lender will discuss the approximate costs with you well before you sign the final paperwork.
The cost varies greatly depending on your area. Some homeowners in states at high risk for natural disasters struggle to find insurance companies offering coverage, while others pay outrageous prices to cover their homes.
Homeowner’s insurance in areas with low risk of natural disasters typically costs less than $1000 annually. The cost is generally rolled into the monthly escrow payment.
But homeowner’s insurance might not be the only insurance that you need.
Flood Insurance
Flood insurance is required if your new home rests in a floodplain, and it is a good idea if your area is at risk for hurricanes or storm surges.
Basic homeowners insurance will typically cover water damage from roof leaks, broken windows, and damaged pipes, but it will not cover damage from flood water.
If a hurricane rips the roof off your house and causes water damage, regular homeowner’s insurance will foot the bill. But if a hurricane causes a storm surge and water flows into your home from the ground level, homeowner’s insurance won’t cover it. You need flood insurance to fill that gap.
Earthquake Insurance
People who live in earthquake-prone areas need additional insurance to cover damage caused by shifting plate tectonics. Regular homeowner’s insurance does not cover earthquake damage.
Although there’s no requirement to purchase earthquake insurance at closing, it’s a good idea if you live in a high-risk area.
Primary Mortgage Insurance (PMI)
Certain loan options require buyers to pay an additional monthly fee to protect the lenders. The fee, called Primary Mortgage Insurance (or PMI), originated with the great housing crisis in 2008.
Borrowers financing their homes through FHA loans must pay insurance to the lender. Borrowers funding through the VA or with a conventional loan typically don’t have to pay PMI.
The idea is that borrowers using FHA don’t have enough collateral, as they only need to put down 2.5%. Therefore, they’re at higher risk of default and need to pay PMI to hedge the lender’s risk.
Inspections
Buyers have a 14-day due diligence period to ensure the house meets their standards. A typical home inspection is usually rolled into the closing costs, but a buyer should consider additional inspections.
Contract a pest control company to conduct a termite inspection to ensure the home is free of infestation. Get an electrical inspection to ensure proper wiring. Get all the standard home inspection add-ons, including lead, radon, and sewer.
Most people’s most significant purchase is a house. Paying the extra money upfront ensures you know exactly what you’re getting.
Additional Closing Costs
Closing costs include inspections, appraisals, loan origination fees, recording fees, title fees, and many other small expenses and fees associated with transferring ownership of real property.
Closing costs vary greatly by state and county. Your real estate agent will provide a summary sheet before closing so you know what to expect. When forming your budget, expect to pay about 10% of the purchase price at closing to account for all these fees.
After the Sale: Hidden Expenses of Settling Into Your New Home
You may think you’re done spending money after you sign all the closing paperwork, but think again.
The hidden cost of buying a home seeps into the next phase: moving and settling into your new home.
Moving Costs
If you can still fit everything you own into your tiny, two-door sedan, you won’t have to worry much about moving costs.
However, you have likely acquired a great deal of stuff while renting and will want to keep most of it when you move into your new home.
Whether you move yourself with a U-haul or hire a company to help you, you’ll have to spend money on your move. In-town moves are relatively cheap, but if you’re moving across the country, the move can cost a pretty penny.
Furniture
Most homes are larger than their apartments, so you may need additional furniture upon moving. Now that you have the space, you will want to use it well, but home furnishings can be expensive.
Do you need a bigger bed, a full couch, or extra side tables? You may have space for a bookshelf or a dining table. Consider these costs when budgeting for your new home.
Decor
People buy homes to create safe spaces for themselves; part of that is decorating it to suit your style and needs.
You’ll need to purchase shower curtains, area rugs, lamps, and everything else that makes a house a home. You may be shocked at how much money your first trip to a home goods store costs.
Appliances
Some homes come with appliances, and some do not. If your home doesn’t come with a refrigerator, washer, dryer, or oven, you’ll have to purchase one.
If the house has older models, you should start saving to replace them.
Renovations
If you buy your dream house, you may not have to worry about renovations. But most homes have minor cosmetic issues that you want to improve.
Consider how much repainting, changing the flooring, or replacing the cabinets will cost.
Tools
You can call the landlord if the toilet gets clogged or a cabinet door falls off when you rent. When you own, you have to fix all these minor problems yourself.
You’ll need to purchase a plunger, a toolset, drill, and extra screws so you have anything you need on hand for the inevitable minor repairs.
Filters
Most modern homes have HVAC systems, and homeowners must regularly replace the filters. Though not a hefty investment, this is an unexpected expense for many first-time homebuyers.
Hidden Cost of Owning a Home
The hidden costs keep coming after you’ve settled into your new home. Before you buy, you should consider Home Owners Association (HOA) fees and property taxes.
HOA
Finding a home without a HOA in some areas is nearly impossible. Homes in new communities almost always have an HOA.
You should always consider the HOA fees when shopping for a house. Some neighborhoods have excellent amenities but charge high HOA fees to pay for them. Others charge lower HOA fees for fewer amenities.
Though HOAs have bad reputations, they aren’t always bad. HOAs help maintain property values; many offer amenities like pools, cookout centers, and clubhouses.
Property Taxes
Though people expect to pay property taxes when buying a house, they typically don’t expect the drastic increases seen in recent years.
Your property tax rate is tied to your home’s value, so when values go up, taxes rise with them. Leave wiggle room in your housing budget to account for increases in property tax due to inflation.
Maintenance
Home requires maintenance. Light bulbs go out, drains clog, faucets leak, paint crumbles, the list goes on and on.
Put money in a sinking fund each month to account for minor repairs as they come up. That way, you’ll never be surprised by a maintenance item.
Emergency Repairs
You never know when a minor problem will morph into a giant money pit. Though homeowners insurance and a home warranty can help, you’ll typically be responsible for a deductible.
You should have an emergency fund of at least one thousand dollars to cover unexpected repairs.
Services
Homeowners might be shocked at how much money they need for basic upkeep and necessary services. While renting, your landlord handled most of these expenses, but now they’re all on you.
Make sure you budget for them.
Landscaping
Many new homeowners want to maintain curb appeal, and landscaping is the best way to do that.
You’ll have to invest money into landscaping even if you don’t hire a professional. At a minimum, you’ll need a lawn mower and weed wacker, but you may need to invest in plants, mulch, a birdbath, or other lawn items to make your home look presentable.
Security
Your home contains everything you hold dear, so you’ll probably want to protect it. You may consider installing motion sensor lights or security cameras to keep your family safe.
At a minimum, you may want to consider a video door camera, but you’ll likely have to pay a subscription service to keep it running.
Pest Control
You got the inspection and know your house is pest-free, but don’t you want to keep it that way? An exterminator will service your property quarterly, ensuring the nasty bugs stay out.
HVAC
Most HVAC systems need servicing. It’s much cheaper to pay for regular maintenance to preserve long-term operation than a system overhaul.
Fire
In many counties, fire protection is rolled into property taxes – but that’s not always true. Some localities require you to pay an annual fee for fire protection.
If you don’t pay, the fire department will not help you if there’s a fire. Is that a risk you’re willing to take?
Trash Collection
Trash collection is also included in property taxes in some locations, but not all. If it is not included in property taxes, you must hire a company to service your trash and recycling.
Utilities
If you’ve always lived in a rental property where the landlord handles some of the utilities, you may be shocked to discover how many separate bills it takes to keep a house running.
You’ll need to set up water, sewage, electricity, and internet/phone services at a minimum. Many homes also have gas hookups for stoves and water heaters. If you live in the Northeast, you may have a giant oil tank in the cellar for heating, and you’ll have to contract a company to fill it regularly.
Lots of Hidden Costs, But Worth It
Homeownership has many hidden costs, but don’t let that deter you from buying. Owning your home is still a top path to wealth and ideal for peace of mind.
However, it’s essential to consider the hidden cost of buying a home while house hunting. When shopping, factor all these potential expenses into your budget to ensure a financial surprise doesn’t catch you off guard.
Budgeting for all the costs of homeownership ensures years of happiness in your dream home.
