The True Cost of Buying a House
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I remember buying our first house. We were brimming with excitement at the possibility of filling our home with lifelong memories. Then came the boom, buying a house is crazy expensive. We obviously knew it was, but we didn’t fully understand the true cost of buying a house. We thought we were only responsible for the price, not realizing there are many hidden costs to buying a house.
We champion home ownership in our society. In many cases, home ownership is a good thing, but the flipside is also true. That’s a debate for another day, but what commonly gets overlooked in the home ownership debate is the true cost of buying a home – and just how much you need to fork out to call that house your home. If you’re hoping to get lucky during the home buying season, keep the following in mind to know just how much it’ll cost you.
Make Sure the Time is Right
The key question in deciding to buy a house is knowing if the time is right. Yes, other things will play a larger role in the overall cost to you, but it all flows out of making sure the time is right. If it’s not, then the house of your dreams will take a bigger hit on your wallet than you might think.
Personally speaking, one of the biggest money mistakes I’ve ever made was buying our first home with no money down. Our first child was on her way, and I had this idea that we had to be in a house. I’m confident that decision cost us thousands of dollars over the life of the mortgage.
Here are some ways you can avoid the same mistake we made:
- You need to have a down payment. Most experts recommend at least five percent, if not closer to ten. Having a 20 percent down payment is ideal. Pick an online bank to start your savings, like Synchrony Bank as they pay 1.55% and have no minimum balance requirement.
- What are rates doing? Interest rates have been incredibly low the past few years but will go up at some point. You need to keep rate in mind, as it’ll impact your monthly mortgage payment. Check LendingTree to compare rates from multiple lenders to find the lowest possible rate.
- Do you think you may move in the near future? If you think you may be moving within the next few years, you may want to put off buying a house now.
- What’s going on in the area to which you want to move? A big reason why we picked the house we bought last year was that it’s close to a new dam site that’ll be completed this fall. The city has lots of recreational components as a part of the site, which is something we want. If they’re building a big mall where you want to move you may want to put off the house or look elsewhere.
There may be other things you want or need to consider, but this will give you a good start. It’s important to remember that many of these things will impact the overall cost of buying your house. The less you put down, or the higher your rate, the more you will pay each month.
If you don’t have adequate savings, now is the time to start. Put the funds in a high yield savings account, such as CIT Bank, as they pay 1.55% on your balance (with a minimum balance of $100) and won’t put your money at risk like investing it would do.
Ok, so let’s say you know that now is the time to buy a house. It’s as simple as coming up with your down payment, and that’s it, right?
The biggest surprise we had when buying our first house were all the one-time costs. Any look at the true cost of buying a house needs to include one-time costs. These are costs you can never recoup and are needed to get the house you want.
Here’s just a short list of things you need to be prepared to pay for, on a one-time basis, before you buy a house:
- Down payment. This is obvious and mentioned above. You should already be growing your down payment.
- Closing costs. Closing costs can add thousands of dollars to your overall cost. Time reports you can expect to pay 2-5% of the cost of your house in closing costs. This includes anything like title fees, insurance, taxes, attorney fees and more. As a buyer, you can negotiate to ask the seller to pay some of the closing costs, but it is by no means a guarantee that the seller will consent.
- Inspection fee. Are you getting a house inspected before you want to make an offer? Be prepared to shell out several hundred dollars, at least, to get this done. We had to do this twice with our last house buying experience as the first house fell through. This meant we had to pay the fee twice and shelled out nearly $900.
- You need to fix something. What if the inspection identifies a problem? The seller may ask you to pay to fix it, or you may need to fix it after you move in; again that is money out of your pocket. This also includes inspections unique to your area. Nebraska has high radon levels, so we’re required to get a radon inspection before buying a house, which usually costs several hundred dollars.
- Moving. This should be a no-brainer, but when you buy a house, you’ll need to move. Unless you have friends who can help, you’ll have to pay something out of pocket to move. This can range from renting a truck to paying movers to move your stuff. That all adds costs to your bottom line.
You may face other one-time costs, so it’s important to know this when you shop for a new house.
If the one-time costs to buying a house aren’t enough to shock you, you’ll obviously face ongoing costs. You may think the ongoing cost is just the mortgage and you’d be wrong – as many homeowners will attest to. There are many other ongoing items that go into the true cost of home ownership. Some of those costs are:
- The mortgage payment. This is obvious and should be expected. If you can’t make your mortgage payment, then you seriously need to look at if it’s time for you to own a home.
- Upkeep. Remember the inspection I mentioned earlier? You may have things you need to repair around your house now that you’ve moved in. If that’s not enough, you’ll soon learn that things break all the time. You’ll want to have an emergency fund to cover those expenses; otherwise, you’ll get in trouble.
- HOA fees. This is the first time we’ve had to pay HOA fees, and ours aren’t too bad at only $80 per year. However, we looked at homes with HOA fees of $600 and more per year. You may need to pay even more depending on where you live.
- Insurance and taxes. You may be able to pay these out of your escrow, but they still add to your overall mortgage amount each month.
- Private Mortgage Insurance (PMI). If you don’t put down at least 20 percent when you purchase the house, you’ll be required to pay PMI each month. In most cases, this will be added to your mortgage payment. In our first house, this added $75+ to our monthly payment. You may qualify for a tax deduction for this, but you never recoup the cost.
You may face other ongoing expenses, but you’ll want to do your best to mitigate those costs. As you can see, the true cost of buying a home can quickly add up.
The Truth: The True Cost of Buying A House is More Than You Think
As should be obvious, the true cost of buying a house is quite a bit more than the purchase price of your home. This doesn’t necessarily mean you shouldn’t buy a house as that’s something you need to decide for your particular situation.
What it does mean is that you need to go into the home ownership decision with seriousness and your eyes wide open. I’ve learned a few things with the purchasing of our first and now current house.
It’s easy to allow costs to spiral, and they can quickly add up. Knowing that, it’s important to have a good cash cushion so you can be prepared for those expenses when you budget for buying a house. It seems like people have their hands out for cash at every stage of the home buying process, so it’s important to be prepared.
That’s also not to mention the ongoing expenses to maintain your house. Again, it’s important to set aside money each month for those expenses, so you don’t incur debt. We have part of our emergency fund devoted specifically for repairs so we know we can handle most things around our house. Home ownership can be a great thing, but it’s also a very expensive endeavor.
What are some other things you think should be included in the true cost of buying a house? What’s one thing that shocked you when you bought your first, or current, house? What are some ways you mitigate costs to the upkeep of your house?
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