How to Keep New Homeowner Costs in Check
Buying your first home is an exciting and breathtaking experience. However, as you become a new homeowner you’re focused on closing and moving into their home with no hassles, it’s easy to be naive about the unexpected costs involved in being a homeowner.
Some of the unexpected costs are unavoidable, such as closing costs. Other costs may depend on where you live, the kind of home you purchased, and your lifestyle choices. Additionally, most people are unprepared for any unexpected repairs that come up just as you’re moving in.
At STEM Lending, we are committed to helping you understand the full picture of what your true costs of owning a home are. Read below to learn more about unexpected costs that can arise when buying a home.
A common mistake homebuyers make is to find a dream house, plug in the principal and interest rate payments into their calculator, and use that number (ex. $2,000) to compare vs. their current rent. This calculation is incorrect as it leaves out a major expense — property taxes!
Find out what your expected property taxes are by checking the MLS (Multiple Listing Service), divide it by 12 and then add that to your estimated monthly payment.
Buyers are typically required to pay for three months’ worth of city & county property taxes at closing. You may also have a choice of rolling your monthly mortgage payment + monthly property tax bill into one lump payment, but this not required in every location.
Be aware that property taxes (just like HOA fees) always go up — sometimes by 1-3% per year, so make sure you’ve saved enough for a cushion for any unforeseen tax increases.
As we’ve mentioned in previous blog posts, closing costs can be a very unpleasant experience, especially if you are surprised at the last minute. Between January 2016 – January 2017, ClosingCorp, surveyed 1,000 first-time and repeat homebuyers to gauge their biggest surprises. Here were some of the findings:
- 17% of all homebuyers were surprised closing costs were even required
- 35% of all homebuyers were surprised that their closing costs were higher than expected
- 24% of all homebuyers were surprised by unexpected costs regarding mortgage insurance
Educating yourself on the specific state requirements for closing costs is key. Some states allow the seller to pay some or most of the closing costs, but to be on the safe side, budget for 2-3% of your home’s value to be paid at closing.
As a new homeowner, all of the landscaping, lawn-care, and maintenance is now all on your budget. If you’re a first time homeowner, you probably have never had to be responsible for a lawn or the grass on the other side of the sidewalks. You will need to budget additional funds to buy home maintenance tools such as a lawnmower, shovels, and rakes. If you live in a colder climate, you may need to purchase a snowblower to help plow the snow in a big snowstorm.
Overall, plan on spending 1 to 2% of your home’s value every year in maintenance and upkeep, according to the Harvard University Joint Center on Housing Studies.
One of the largest triggers for a family to move away from large city apartments to single-family residences is the need for space. If you and your spouse have just had a second child, or are thinking of expanding your family, you’ll likely be moving to a much larger house. This means that you will likely have to buy more furniture to make your house a home.
There are ways to reduce your expenses by buying furniture from your friend’s parents (who may be downsizing) or by shopping estate sales. You can also space out your furniture purchases over months. Given how expensive items such as beds, couches, and dining tables can be, consider what your total expenditure on furniture based on the square footage of the house.
As a current homeowner, believe me when I say: your utilities costs can be as high a number as your property taxes. The seasonality of these bills is a big factor in how they appear as an unexpected cost. Additionally, if you were previously a renter, depending on the state where you lived, you may or may not have had to pay for heat or hot-water.
In the U.S., energy costs account for 5 – 22% of families’ total after-tax income, according to a national study. Although climate and location plays a significant role in consumption, the age of the housing stock also plays a role.
Estimates for annual utility bills change with climate, and the national average is ~$3,000. Ask a parent, co-worker, or friend with a home in the same county you’re considering, and go over their most recent utility bill. This kind of real world comparison is very helpful when it comes to considering unexpected costs in home maintenance.
This may come as a surprise, but kids (young children) can be difficult to keep track of in your new house! They are the biggest joy in your life, but…they can also put holes in walls, draw on walls, and spill all types of juices on carpets and rugs. Kids who’ve just learned to walk could run into a screen door, or throw a toy that breaks a window.
When you were a renter, your biggest fear was losing your security deposit due to damage to the unit. Now that you’re an owner, the costs can be hundreds, if not thousands of dollars more.
Setting aside even a few hundred dollars for accidental damages from children can be a useful war chest as your family grows.