Buying a home is the most important purchasing decision many of us will make, one which has far-reaching consequences on our future financial health and corresponding comfort and stress levels.
When done correctly, homebuyers can experience all the benefits that homeownership offers while building equity and their own wealth each month. However, when done poorly, homeownership can be detrimental to your savings, making it a challenge to simply pay your bills on time.
Florida-based real estate agent Alexander Diaz de Villegas, who works for Battlefield Investment Group alongside his friend and business partner John Reasor, says prospective homebuyers should allocate no more than 25% of their net earnings towards housing expenses.
If that figure only had to take into account your monthly mortgage payments, the budgeting process would be a breeze, but naturally, things aren’t nearly that simple. Rather, that figure should cover all homeowner-related costs, which includes many fees that are typically overlooked by new homeowners.
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The Most Common Hidden Homeowner Fees
It’s impossible to effectively budget for a home purchase without knowledge of the many fees that homeowners incur, so let’s take a brief look at some of the most common ones and the typical costs associated with them.
Private Mortgage Insurance (PMI) – PMI provides an added incentive for putting down the greatest down payment possible on a home, above and beyond the built-in interest savings you’ll enjoy from doing so. If you don’t put down at least 20%, this form of mortgage loan insurance will be added to your mortgage payments, raising them by anywhere from less than 0.5% to more than 3.5%.
Closing Fees – These fees must be paid before the closing date and could amount to 3%-6% of the home’s value. Closing fees usually include the legal fees (0.5%-1%), home inspection fees ($300-$600), a recording fee (0.2%-0.5%), insurance fees like title insurance (1%), and the property taxes due on the home through the end of the current tax season, which will vary based on when the closing date is.
A general home inspection may or may not be required by your lender, but should be carried out regardless according to Alexander Diaz de Villegas, as it could uncover costly structural or other issues present in the home.
Land Survey – Your lender will likely require a land survey to be performed as well unless the last one was executed recently. This survey will outline and possibly update the property’s boundaries and can add another $1,000 to $2,000 to your costs.
Real Estate Transfer Taxes – These taxes vary widely by state and in some cases, scale based on the value of the home. Several states, including Alaska, Texas, and Missouri, have no transfer taxes at all, while those that do have fees ranging from 0.05% (Illinois) to as much as 4% and above (Pennsylvania and Delaware).
Additional Unexpected Homeowner Fees To Budget For
In addition to all of those hidden fees are the many not-exactly-hidden-but-often-unexpected fees that also crop up for homeowners. Utility costs, maintenance fees, and insurance account for more than half of that figure, with homeowners paying out nearly double the utility costs that renters do.
With more area to clean and furnish, homeowners can also expect to spend twice as much money on housekeeping supplies, household operations, and home furnishings and equipment (like the lawnmowers and snowblowers you never needed while you were living in that 12th-floor apartment).
Tips To Effectively Budget For Hidden Fees
Now that you have a grasp of the breadth of additional fees that you’ll need to consider on top of your mortgage payments, let’s take a look at a few ways to more effectively budget for them ahead of time so you can more accurately judge the viability of buying a particular home.
When it comes to property taxes, the rates paid during the last tax year are frequently posted alongside a home’s real estate listing, providing a good estimate for what your monthly payments are likely to be. Real estate agents can prove invaluable when it comes to estimating some of your other monthly costs as well, given their knowledge of local homeowners’ insurance rates and mortgage rates.
Alexander Diaz de Villegas also recommends consulting the home sellers regarding their monthly bill payments, which can function as a rough guide for what your own payments may look like in that home. Realtors can also be a big help in this regard, arranging for you to take a look at the seller’s past bill payments through their own realtor.
Diaz de Villegas adds that while 25% of your gross income is a good starting point when budgeting for your housing expenses, it can be increased further if your other monthly debt obligations, which could include student loans, credit cards, and car payments, are minimal. If that’s the case, you could comfortably set aside 30% of your earnings for housing expenses, providing an added buffer against the many hidden fees you’ll encounter as a homebuyer.
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