Are You Ready for The Hidden Costs of Homeownership?

If you’ve been a long-time renter, inevitably, you might wonder when it’s a good time to take the leap and buy a home.

This is a natural step, after all.

There are many advantages in owning a home including: Building wealth through home equity, receiving tax deductions, potential eligibility for a capital gains exclusion, the pride of investing in your community, and the pride of homeownership.

But even with all the advantages, there are many hidden costs you might not consider before taking the mortgage plunge. And these costs can contribute to an overall price tag that adds up to more than your monthly mortgage payment.

Before you take a leap into homeownership, take care to ensure that you’re financially ready to absorb the so-called true cost of homeownership. Your considerations when buying a home should delve much deeper than the low interest you might be able to lock in right now.

Read on to learn more about the biggest hidden costs of homeownership you can expect.

If you’re a realtor, consider forwarding this to your clients to help them prepare for the jump into homeownership.

Hidden Cost #1: Private Mortgage Insurance

Private mortgage insurance, or PMI, is mortgage insurance you may be required to pay with a conventional home loan. PMI protects the lender in the event that you stop making payments on your loan.

Generally, you are required to pay PMI if you have a down payment that is less than 20% of the home’s sale price with a conventional purchase loan. PMI can be paid on a monthly premium basis added to your monthly mortgage payment, paid up front, or paid partially up-front and partially monthly.

Learn more about PMI.

Hidden Cost #2: Homebuying Fees and Closing Costs

When you purchase a home, there are lots of fees involved, including fees on the buyer’s end, third party fees, and closing costs. These include:

  • Earnest Money Deposit - This is credited at closing toward your down payment and closing costs and is usually 1-2% of the sales price
  • Home Inspection - This is necessary for you to see if things are wrong with home or any upcoming issues
  • Appraisal - This helps you and the lender make sure that the home is worth what you are paying.
  • Third Party Fees - These include fees for pulling credit reports, flood reports, tax service fees, closing attorney fees, escrow fees, title insurance fees, recording fees, and homeowners association fees.

Your closing costs with a traditional lender might include add-on fees for the loan application, loan processing, loan underwriting, and loan funding.

Closing cost fees are significantly reduced when you work with a mortgage broker, like me. We don’t add loan application, processing, underwriting, and funding fees to your overall closing costs. With a mortgage broker, you can expect closing costs to be around 1.5% to 2% of the home purchase price, depending on your loan size. With traditional lenders, closing costs can range as much as 3% to 6% of the loan amount.

Learn more about closing costs.

Hidden Cost #3: Homeowners Insurance

When you own your own home, you need a plan to protect it from the unexpected. The unexpected could be a number of “perils,” as home insurance providers define them, including:

  • Natural disasters such as hurricanes, tornadoes, earthquakes, floods, bad storms, blizzards, ice storms, and wildfires
  • Mechanical, plumbing, or electrical system failures that may lead to costly home damage
  • House fires
  • Burglaries or damage from break-ins
  • Freak accidents -- Such as houseguests injuring themselves on your property, trees falling into your roof (natural disaster-related or not!), or for example, a neighbor’s car backing into your home (It’s happened!)

A solid homeowner’s insurance policy will cover most of the above perils with add-on protection policies needed - depending on your geographic location and climate.

In certain areas, you might need to add coverage for flooding -- whether you live in a high-risk flood zone or not -- and if you do, it’s federally required. You might need earthquake insurance if your area is prone to quakes. You may need added wind damage insurance if you live in an area prone to hurricanes or tornadoes, and you might want a special policy or an umbrella policy for special hazards.

A homeowner’s insurance premium in 2021, on average, runs just above $1,000 yearly for homes valued at $250,000. Check out BusinessInsider’s tool to get premium averages by state. This cost is usually broken down and paid on a monthly premium basis.

Hidden Cost #4: Homeowner’s Association Fees or Condo Association Fees

If you buy a home in a neighborhood with a Homeowners Association or buy a condo or townhome in a development with a Condo Association, you’ll likely have association fees. These fees help cover the cost of community amenities, such as swimming pools, recreational facilities, maintenance & repairs of community or condo facilities, and neighborhood or common area exterior landscaping.

HOA and Condo Association fees can be all over the board, from a few hundred to a few thousand annually. These fees can generally be paid monthly or all up front. If you don’t pay them, you risk having a lien put on your property or potential foreclosure.

Hidden Cost #5: Home Repairs, Maintenance, and Updates

Owning a home means you don’t have a landlord to call when a system breaks down or something needs repair. You become the landlord. When you think about the true cost of homeownership, be sure to think about the cost of ongoing maintenance on your home.

Recent data shows that ongoing maintenance and repairs for homes in solid condition runs about 1% of a home’s market value annually. So if you purchase a $300,000 home, it’s a good idea to budget for $3,000 worth of maintenance and home repairs in any given year.

One great way to do this is to set up a dedicated bank account solely for home repair and maintenance costs. That way when a system breaks down, you have funds available that are earmarked for repair. As a rule of thumb, plan to set aside at least 5% of your mortgage payment each month to prepare for future maintenance expenses.

There are a few more bigger ticket items to think about in the span of owning your home. The average roof, depending on type, lasts about 20-25 years - longer with more durable kinds of roofing. Most solid HVAC systems last 15 to 25 years. And over the course of owning your home, you might need to repair electrical systems, in-wall plumbing, home siding, or make foundation repairs.

With any home purchase, it’s important to always have a home inspection performed - primarily to ensure there are no major problems, but also to get information about the existing life and condition of major home systems. Budgeting for ongoing maintenance and repairs alongside your new mortgage payment will put you in a better financial position to absorb these costs.

Hidden Cost #6: Lawncare and Landscaping

It may be lower on the priority list, but if you own a home with a yard, you’ll need to determine how to maintain it. Neighborhoods with homeowner’s associations often require you to maintain your yard and landscaping. Plus, as a homeowner, you’ll likely want to do this anyway as part of the pride you feel in owning your home.

As you’re budgeting out your total cost of homeownership, be sure to think about how you’ll take care of your home’s exterior. You might hire a lawn care service, which will add a monthly bill (the current national average for lawn care is around $129/monthly). Alternatively, you might do the lawn care yourself, which will likely be a higher one-time cost for equipment and the cost of your time.

Either way, be sure to figure this cost into your homeowner budget.

When I speak to clients I always say we want to make you a successful homeowner.  We do not want to just get you into a home with no plan for all of the hidden expenses.  Just a simple can of paint costs money and if you have not planned properly you could fail as a homeowner.  We believe strongly in making a plan to not only buy a home but also to be able to afford to be a homeowner. It is not just a mortgage, it is a financial tool....

I Can Help You Purchase a Home and Prepare Financially to Become a Homeowner!

The true cost of homeownership involves many more ongoing expenses than the ones you’ll pay at the closing table. As a new homeowner, your goal should always be becoming a successful homeowner. That’s why it’s important to create a financial plan that allows you to not only purchase a home, but afford the total ongoing cost of homeownership. You’ll be better prepared financially, more confident as a homeowner, and achieving your American dream will be that much sweeter.

If you’re looking to buy a home or just starting the process of preparing, give me a call! I’d love to chat with you about the true costs of homeownership, how I can help you grow financially through mindful lending, and guide you through the loan process when you’re ready. Reach out to me at 480-313-7103 or by emailing sam@mindfulmoneyusa.com.


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.