Expenses First Time Homebuyers Can Easily Overlook

First time homebuyers are often seen as frivolous or naive and basing their decisions on pure emotion rather than logic and financial calculation.  This cliché does not need apply to you.  By doing a little research and talking with the pros, you’ll be able to avoid overlooking sneaky expenses before and after your purchase.

If you’re brand new to the process of buying a home, be ready for these expenses:

1.    Maintenance costs

Even the most experienced home buyer underestimates the cost of maintaining their home.  It is imperative to generously budget for maintenance costs from day one.  You need to be able to pay for emergency costs right away when they suddenly occur.  Your attention to detail regarding maintenance will also keep up your home’s value.

∙    Home ownership is a somewhat unpredictable ride.  The only certainty is that your mortgage payment is due on the first of each month.

∙    Coldwell Banker estimates that homeowners should budget approximately 1-4% of their home’s value toward yearly maintenance costs.  Expect higher maintenance costs if you have pets, children, or renters.

2.    Do not underestimate your down payment

With all of the talk about down payments, it can be confusing to set aside the right amount.  It’s financially prudent to avoid loan programs that offer loan products with “no money down”.  While you won’t have to put up a down payment, your interest rate will be extremely high and you’ll incur other fees and costs as well.

∙    Any down payment less than 20% will necessitate Private Mortgage Insurance.  This is a policy that insures the lender against default for a set amount of time, usually long enough for the borrower to gain a 20% or greater equity stake in the home.  This is so they know you won’t leave the keys on the counter and bolt.

∙    PMI isn’t expensive by itself, but it is an added cost that you need to factor in.  They’re going to get their money no matter what; either up front in a lump sum or slowly over time.

∙    For example, if you purchase a home worth $150,000 and put down just 3% ($4500), you’ll need to purchase PMI insurance to cover the missing 17% of the down payment.  In this particular example, the monthly PMI would be $118.82 on top of your mortgage payment.  This is a premium on an insurance policy, it’s not money that goes toward the principal or interest of the loan!

3.    Closing costs

Novice buyers tend to underestimate the amount it costs to close a loan. Closing costs will generally come to approximately 3% of the purchase price of the home. However, the cost will vary by lender and by zip code.

∙    Fees included in closing costs are legal fees, lender fees, transfer taxes, and title costs.

∙    Employing an experienced local realtor will not only help you accurately estimate your closing costs, but they will also be able to guide you to vendors with the lowest fees.

∙    In a buyer’s market, the seller may be willing to pay some of your closing costs in order to facilitate the transaction.  The seller does not want the property to sit under contract for several weeks only to find out the buyer can’t afford to close their loan.

Purchasing your first home is a rite of passage.  It is not uncommon for homebuyers to get into trouble by overextending themselves financially or choosing a home that isn’t right for them and their plans for a family.  Be sure to account for all of these sneaky additional expenses for closing on your new home.

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