The Other Expenses
Imagine opening the door to your new home. As you step inside, you’re thinking about all the memories that are going to be made there. Worries of your mortgage and other finances quickly fade as you begin dreaming of laughter, happiness, and warmth. Until you realize its cold, so cold you can see your breath. After checking the thermostat and a few other things you discover that the furnace is broken, and so is your excitement.
Lucky for you that was just imagination, but for me and my wife it was reality. And that was just the beginning. Within three months of owning our first home, the furnace had to be repaired, our hot water heater died, a water pipe burst, our roof leaked, and we had water in our basement multiple times. You could say we definitely weren’t expecting that when we signed the closing documents.
Hi I’m Devin. My wife and I’s experience as first time home buyers has sparked my desire to write about something I’m going to call the “other expenses.” What are other expenses? You could define them as costs which will occur that you may not expect or consider when you’re looking to buy your first home. Saving money for these “other expenses” is extremely important because they can wreak havoc on your bank account if you’re not prepared.
Here are some of the "other expenses" that you need to be aware of as you search for and buy the perfect home:
It’s easy to overlook closing costs, but forgetting them can leave you more burnt than forgetting sunscreen when you go swimming. Closing costs are made up of fees that are paid when you close on your home loan. They include items like property tax and hazard insurance premiums, title insurance, prepaid interest, and recording fees. Since each home loan is unique, it’s possible for your closing costs to contain different fees. Just watch out for the fake fees that some mortgage lenders make up. If something looks fishy, get a second opinion.
How much are closing costs? When you work with Wasatch Mortgage, your closing costs will only be around 1.5% of your total loan amount. Other lenders can charge you as much as 3 to 5%. On an $180,000 home loan that’s roughly $2,700 in closing costs at Wasatch Mortgage and over $5,000 with another lender. As you prepare to buy a home, talk to you loan officer about closing costs and see how you could potentially lower them.
As much as you’ll love your new house, it won’t be perfect. I think my wife and I’s example shows that things can and will go wrong. The costs to repair our roof, water heater, and other issues were nearly $600 and that was with help from our home warranty. Without a warranty we estimate that our expenses would have been at least double. Whether it’s a broken water pipe or a blown furnace, you need to plan on having some extra money saved up for when things break or need repaired because duct tape can't fix everything!
Property Taxes and Hazard Insurance
Property taxes and hazard insurance are a necessary evil, kind of like having a job. Each year your insurance and taxes will cost 2%, on average, of the purchase price on your home. So if you bought a home for $200,000, your hazard insurance and property taxes would be around $4,000. You could also get an idea of these costs by asking the sellers how much they pay for property taxes and hazard insurance.
Typically your mortgage will have something called an escrow account. In an escrow account, 1/12 of your annual property tax and insurance premiums are collected each month. They're collected at the same time as your mortgage payment so be ready for a monthly payment that’s higher than just principle and interest. On the bright side, when your insurance and property taxes become due, your mortgage lender will take money from your escrow account and pay those expenses on your behalf.
It’s easy to drop a dime… or two thousand when you move into a new home, trust me! New furniture, appliances, tools for the garden/lawn, and other purchases can quickly add up. There’s no way to avoid these “other expenses,” but the best advice I can offer is to space these costs out over time. Start with the necessary things and wait as long as you can for the other purchases. For example if you buy a home in November, you could hold off on most of your gardening and lawn care tools until spring.
Of all the “other expenses,” utilities can have one of the largest impacts on your wallet. Recent research by ATTOM Data Solutions found that utilities (gas, electricity, water, and sewer) increase your monthly housing expenses by 25 percent. That means if your monthly housing expenses, like your mortgage payment, were $700, utilities would cost you another $175. The ATTOM study also stated that when utility costs are considered, most homes at the top end of your budget instantly become unaffordable. So before you buy a home, find out if the utility costs are going to work with your budget. You could also try tackling a few of these tips to lower your utility bill so it's more affordable.
Being part of a homeowners’ association can be beneficial. They’ll help you maintain a clean neighborhood and other things, but it comes with a cost. According to Investopedia, a typical homeowners’ association fee is between $200 and $400 dollars a month. Before you buy a home in an H.O.A., determine what your membership fee will cost AND look into their rules. Some associations have rules that won’t line up with your lifestyle, such as limiting the number of cars you can park in your driveway. Plus if you violate any of the association’s rules, you’ll be expected to pay a fine.