Preparing for the Hidden Costs of Homebuying

Over the holidays, I visited my brother who recently purchased his first home. He told me about his experience of being a first-time buyer: the excitement, the stress, the frustration, and to his surprise, all the unexpected expenses involved in buying and occupying a new property.

Life as a renter can be easy when the only thing you need to worry about is your monthly rent and the occasional utilities. The overall maintenance and management of the rented property and associated expenses, including property taxes, is handled by the landlord.

Reality changes once you start considering buying a place to call home instead of simply leasing a space. There are many educational resources available to help people make a more informed decision when it comes to buying a house. Let’s be honest, most people will have to finance their first home. For starters, you’ll need to save up enough money for a down payment, regardless of the price of the property. You’ll need to have at least 3%-20% to put down (depending on the type of financing being used). And this is only the beginning. A sum of money needs to be allocated to closing costs, appraisals, insurance policies (flood insurance where required), and unpaid taxes and utilities left by the previous owner, as well as any unpaid or due association fees, all even before occupying the property!

The following is a list of possible unexpected expenses and how to be prepared to tackle them:

Application Fees, Loan Fees, and Mortgage Interest Rates
There is a pool of banks and financial institutions ready to lend you money for your mortgage. Choose a bank with a good reputation and the best deal when it comes to application fees, loan origination, other fees, and interest rates. The interest rate will vary depending on your income and credit status, so make sure that your financial picture is up to par.

Appraisal and Inspection Fees
You obviously want to ensure you are getting the most for your money, that the property is in good condition, and that it’s worth the asking price. The appraisal is beneficial because the property may be worth more than the asking price. Therefore, you are walking into equity as soon as you move in. The appraisal could also save you money if the property doesn’t appraise at asking price. Both of these fees can round up to hundreds if not thousands combined. There are plenty of agencies that offer these services, so research the reputation and pricing of different agencies before hiring them.

Closing Costs
Having saved up for a down payment is really not all the money you need to buy a home. According to Business Insider, the average closing costs are around 2.5% of the home cost. This is not set in stone and may vary from state to state. Title fees will cover the cost of researching the title of the property and can cost you up to a couple hundred dollars. Same applies to attorney fees. To find a good real estate attorney to help with the closing process, use referrals or conduct online research. This will cost you a few hundred dollars a well. Be sure to be prepared financially, so you’re not taken off guard when you are presented with these fees. Use your attorney properly, and don’t leave any questions unanswered either. The better informed you are, the better off you’ll be and the more money you’ll potentially save!

PMI, Property Insurance, Home Association Fees, and Property Taxes
If you put down less than a 20% down payment, you’ll be required to pay for the PMI or private mortgage insurance. This is anywhere between .3% and 1.5% of the mortgage, according to Business Insider, and is determined mainly by the size of the mortgage, the down payment, and the buyer’s credit score.

Business Insider averages annual property insurance between $2216 and $1000 annually. Research property taxes and values in the neighborhood you’d like to live because even though the average property tax may be low, it can be a lot higher in different areas. Researching insurance companies is also a good idea. Combined on a monthly basis, this can be an extra couple hundred dollars on top of your regular mortgage payment.

Lastly, if you are planning on buying a condo your realtor should let you know of any Homeowner’s Association Fees.  These are maintenance fees required to maintain the property, the landscaping, pools, and elevators. Sometimes certain utilities may be included in this fee. Ask questions as to how much the fees are, how they are determined, and how often they change. Again, this can add a couple of hundred dollars to your mortgage payment and can have an impact on your finances down the line.

Higher Utility Bills, Maintenance, Renovations, and Used Appliances
If you are moving from a tiny 1 bedroom to a roomy 2-3-bedroom home or condo, you should expect higher utility costs. As a renter, some utilities may be included in the price of the rent, but when you buy, you will even have to pay for water! Check that all appliances, furnaces, and AC equipment are working properly and not too outdated.  Old appliances can raise your energy costs and may need to be replaced shortly which means you’ll need to dish out more money to buy new appliances!  Unless the property is 100% sold as is, you may ask for some sort of seller’s credit. They obviously want to sell the house, so who’s not to say they’ll work with you on this one!

Same applies to maintenance and renovations. Let’s be honest, unless you are buying a brand-new construction, most people will buy a used house. Used houses will have some defects. Determine costs associated with maintaining the property in the summer and winter months, and if renovations, other than a cosmetic need to be done, have your realtor negotiate to have items fixed or to get a seller’s credit. It’s all about saving money for that giant TV you always wanted!

Now, let’s return to the conversation I had with my brother. He told me about a very unexpected expense he had to deal with. His closing date was set for the 29th of September, and he intended to move into his new property that weekend. His apartment was rented already, so tenants were moving into his old apartment that same weekend. Little did he know that things could go wrong at the last minute. There was a clerical error that disrupted the loan from getting signed that day. He had to move out of his apartment with his two dogs into a hotel room while paying to rent a truck full of all his belongings. The error was fixed and the loan rewritten, so a week later he was finally able to close on his loan. The lesson of the story? Allow yourself enough time to close on your home and move out, so you don’t have to deal with something as unexpected like this. Paying for a hotel room, meals, and moving trucks for a week can definitely add up to a costly expense.

Are these grounds for not buying property? Absolutely not! Owning a home and building equity can be one of the best investments you can make! Education is key.  Educating yourself and using a reliable, trustworthy and knowledgeable realtor, as well as shopping around for better interest rates and better deals on services like appraisals, attorneys, and general maintenance, can save you hundreds even thousands of dollars.

Be prepared, and be the happy homeowner you were meant to be!

Orlando Perez
Real Estate Broker
708-469-9160
orlando@fultongrace.com


_Orlando Perez_1_circle
Blog by: Orlando Perez
Orlando is a bilingual (English/Spanish) sales and consulting professional with a passion for Chicago and its diverse culture and neighborhoods. He specializes in sales and rentals on the North Side and
 maintains a high standard of service as he works to afford clients their housing dreams. Any chance to improve his customer service, he takes. Connect with him today!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s