If you put less than 20% down when you obtain a mortgage, your lender will most likely require you to obtain private mortgage insurance, which will also be added to your monthly mortgage payment. FHA loans have their own type of mortgage insurance, while conventional and other types of mortgage borrowers can obtain private mortgage insurance, or PMI. This expense can vary considerably depending on the type of mortgage and how much money you’re putting down. You can request to cancel your mortgage insurance after you pay down the loan to a loan-to-value (LTV) ratio of 80%.
I already mentioned that property taxes, homeowners insurance, and mortgage insurance are generally added to your mortgage payment and deposited into an escrow account. Well, your escrow account doesn’t just start from zero — you’ll most likely be required to make an initial deposit at closing. This will give your account some reserves, in case your property taxes or insurance bills end up being higher than the lender’s initial estimate.
Mortgage points are an optional expense you could choose to pay when you obtain your mortgage. You can pay “points” on your mortgage, which is an up-front expense, in exchange for a lower interest rate over the term of the loan. One point is equal to 1% of your loan’s initial principal balance, and this expense can be worth paying in many cases — particularly if you plan to be in the home for many years and the long-term interest savings outweigh the cost of paying points.
Closing costs are another expense that can vary tremendously based on your home, location, and several other variables. Generally, closing costs run from 1% to 3% of the home’s purchase price but can be significantly higher, especially when it comes to low-priced homes.
In addition to some of the other expenses mentioned (points, prepaids), common closing costs include your lender’s fees for origination, processing, and underwriting the loan, appraisal costs, title insurance, deed recording fees, document prep fees, and credit report fees, just to name a few.
Most people who have an apartment paying monthly rent are used to paying certain utilities, particularly electricity, cable, and internet. When you buy a home, however, you have a monthly cost for some utilities that you aren’t used to paying. Water is often included with rental properties, as are sewer and garbage collection expenses. Be sure to budget for these when you’re shopping for a home.
If your new home is in a neighborhood (or if you’re moving into a condo or townhouse), there’s a good chance that you’ll have to pay some sort of homeowners association (or HOA) fee. These can vary dramatically based on your location and the services the HOA dues cover.
For example, my monthly expense for HOA fees $30 per ($380 annually), which is on the low end and covers common area maintenance, a community pool, and a few other things. However, it’s not uncommon for HOA dues to be much more, especially for condos and single-family homes where it covers things like building insurance, cable, yard maintenance, or other such expenses.
Here’s the biggest wild card expense you need to prepare for. Your home will need maintenance over time, and if you’ve been a renter, maintenance has probably been your landlord’s responsibility. Home maintenance expenses can range from minor costs like replacing your air filters to major costs like replacing your roof.
As a general rule, it’s a good estimate to expect maintenance expenses to be about 1% of your home’s value per year (so, $2,000 on a $200,000 home). This can vary significantly from year-to-year and can be much greater for older homes.
Set a realistic budget with these costs in mind
Here’s the point. When first-time buyers are shopping for a home, they often have unrealistically high expectations of how much they can afford to spend. One big reason for this is that they aren’t aware of all of these expenses. I can tell that I would have liked to have read a list like this before my wife and I bought our first home years ago.
The bottom line is that by having a realistic idea of how much you’ll have to pay for your home and its associated expenses, you can avoid getting in over your head with housing costs that are too high before it’s too late.
View more information: https://www.fool.com/the-ascent/mortgages/expenses-of-home-ownership/