Buying a home can be a smart money move. Experts consider homeownership one of the most stable ways to build wealth, and your monthly mortgage payments are benefiting you rather than your landlord. But homeownership can also come with some financial difficulties, many of which catch buyers by surprise. Almost two-thirds, 63%, of millennial homebuyers end up with regrets, largely because they underestimated the costs, according to a 2019 Bankrate survey.
To make sure you don't also end up wishing you'd done something different, remember to account for four significant expenses lots of first-time buyers overlook — some of which can add thousands of dollars to the price of a home.
The average household spends $2,279 each year on property taxes, according to WalletHub's assessment of Census Bureau data. That burden varies widely depending on where you live and the value of your home. In the WalletHub report, the median New Jersey home value of $321,100 generates annual taxes of $7,840. In Hawaii, the median home value is $563,900, with annual taxes of just $1,529.
First-time homebuyers ought to be aware of what their property taxes will be when they purchase and how they may change in the future, says Sean Keating, a certified financial planner and mortgage expert with Rosso Financial Group in Sea Girt, New Jersey. Municipalities periodically reassess home values, and you could be in for a shock if your taxes are based on an outdated figure.
Jeff Hechler and his wife, Sarah, are saving to prepare for such a property tax jump. "We put aside money routinely for property taxes, but they can sneak up on you," says Hechler, a software engineer.
The couple bought their first home in Ypsilanti, Michigan, last year for $287,000. But the property's assessed value is currently just $152,800, according to local property records. If their purchase triggers a reassessment, as the Hechlers expect, the new taxable value would be a maximum of 50% of the purchase price.
As a result, their monthly property tax burden could increase from its current $458 to as much as $800, based on estimates from the Michigan Department of Treasury's property tax calculator. "Ask me again in September," Hechler says.
While the typical first-time homebuyer puts down only 7.6% of the purchase price as a down payment, there's a good reason why 20% is still considered the standard: mortgage insurance. If you put down less than 20%, most lenders will require you to pay private mortgage insurance, or PMI, until you've paid off 20% of your home's value.
Typically, PMI works out to 0.5% to 1% of the loan balance every year. The amount you pay within that range varies depending on factors like your credit score, the size of your mortgage, and the lender you're working with.
For someone putting down 7.6% on the typical $220,000 starter home, a 1% PMI could amount to as much as an extra $2,000 per year until you get to 20% equity.
Video by Jason Armesto
Nationwide, utility bills average $3,000 a year, according to a 2018 Zillow analysis on hidden home costs. If you're a renter not used to paying for say, water and sewage, those extra expenses could require adjusting your budget.
During your home search, ask to see recent utility bills so you're aware of potential trouble spots like substantial winter heating use or a lawn that generates big water bills. You may be able to make home improvements that help you use less energy and cut your costs.
As a homeowner, you're on the hook for repairs. "Small things like a drain not draining — which used to be a 'no-big-deal, call the landlord' situation — now require both a financial and time investment to solve," says Hechler, who recently had to contend with a hole in his living room ceiling thanks to a leaky pipe.
Even routine maintenance costs can add up to more than $3,000 per year for the typical homeowner, according to Zillow. The site considered expenses like HVAC repairs and maintenance, gutter cleaning, lawn care, and carpet cleaning.
Budget for routine maintenance and emergency repairs as part of your housing costs. Keating recommends setting aside an amount equivalent to 4% to 6% of the purchase price for maintenance in the first year, and 1.5% to 2% for every year after that. If you're buying a fixer-upper in need of major repairs, experts say 10% is a good ballpark figure.
First-year homebuyers have "to buy everything for the first time," says Keating. "They don't own a wheelbarrow, they don't own a rake, you know? A lot of these one-time costs come up."
While all these costs may seem daunting, Keating hopes buyers won't be dissuaded, just better informed. The stability that comes with homeownership can be valuable for a couple starting a family, for example, or becoming part of a community in a way that can be difficult when moving between rentals every few years.
Hechler agrees that becoming a buyer is worth it. "Let me tell you my single favorite part of homeownership: The mail always arrives."
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