The 4 Most Overlooked Expenses When Buying a Home

June 24, 2016

Connect Member

Co-founder of ReadyForZero.com, the leading resource for debt & credit related tools and education.

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If you’re thinking about buying a house, you’re probably excited to reach this important milestone. But have you considered all of the costs that go along with it? It’s easy to get caught up in the excitement, but before you bite off more than you can chew, here are four often-overlooked expenses you’ll want to include in your housing budget:

1. Closing Costs
A closing cost is a fee home buyers pay at the end of a transaction when the property title is handed over to the buyer. Typically, these fees can range anywhere from 2 to 5 percent of the home value. According to Zillow, some of the bigger closing costs can include the appraisal, buyer’s/lender’s attorney fees, an underwriting fee, and a processing fee. A few days before closing (at least three), you should receive a disclosure statement listing each fee along with an explanation as to why it was needed.

One piece of advice: Most of the time, fees are negotiable. Lenders are often willing to negotiate the fees upon closing. Ask your mortgage broker to walk you through each fee and see what you can cross off the list. It could end up saving you a lot of money. Some of the items you may be able to negotiate include loan origination fees, underwriting fees, and the home inspection cost. Another tactic is to have the seller pay the closing costs. They can benefit from this as well since it counts as a tax write-off (although in seller’s markets, it’s not likely to be an option).

2. Escrow Reserves
When you’re purchasing a home, typically the lender will have you prepay six months of escrow payments for your taxes and insurance. So, if your annual real estate taxes are $3,000 per year, you’ll need $1,500 in reserves. This is done to ensure that your property taxes are paid on time. Failure to pay your property taxes can result in a lien being placed on your home, so most lenders will want to protect themselves. Although these escrow reserves aren’t considered fees, they will be included in your overall closing costs.

The same goes for your homeowners insurance as well. Lenders usually will require six months of payments in advance. In addition, since your monthly mortgage payments will also include your taxes and insurance, be sure to factor this in to make sure you can comfortably afford the home. If you’re wondering how much is too much to spend, you’ll want to make sure that your total housing payment is under 32 percent of your gross income.

3. Furniture and Decoration
Assuming you’re not going for the ultra-minimalist look, you’ll want to decorate your new home and give it a personal touch. You’ll need a sofa, beds, lighting, artwork, paint or wallpaper … the list goes on! Budget wisely and follow these tips:

  • Take inventory of what you already have and can use in your new house, and from there, decide how much you’d like to spend on new decoration.
  • Research which decorative projects you can DIY. If it’s nothing too invasive, it could be worth not hiring a designer or contractor.
  • Consider how long something will last. Sure, a couch that costs $100 may be good for a couple years, but what about five or 10 years down the road?

4. Home Improvement
Are you moving into a fixer-upper? Don’t like the tile in the bathroom? Kitchen appliances need replacing? Home improvement projects are a great way to maintain the value of a house, but they can also set you back into the thousands, even tens-of-thousands. Want to add on a bathroom? The average cost is near $20,000. Need a full kitchen remodel? Set aside around $40,000. Evaluate and prioritize your home improvement projects, and take a little-by-little approach, especially if some projects can wait. That way, if something unexpected comes up, you won’t have to worry about a half-finished project. If you’re thinking about financing your home improvement project, make sure you can comfortably afford the monthly payments.

Now that you know about these costs, take the time to revisit and carefully plan your budget. You’ll be happy you did.

Rod Ebrahimi is a member of the DailyWorth Connect program. Read more about the program here.

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