The 4 Hidden Costs of Homeownership Every Homebuyer should be Aware of

Buying a new home is both exciting and terrifying. Right now, people are in the hype of buying a home because the rates have been so low. The homeownership excitement is especially coming from the young people who are tired of the ever-rising rental costs and the idea of having their own home, a place where they can build and grow their equity doesn’t sound that bad.

Homeownership for a long time has been used as a pillar of wealth creation. It is a cornerstone to the American dream, which explains why there is an insatiable demand for homes. However, first-time homebuyers may be in for a shock as homeownership is more than just a bunch of transactions between the sellers and the buyers. 

The real cost of homeownership involves many different hidden costs that go beyond the monthly payments. Usually, some of the hidden costs are inescapable while the others are unpredictable, and occasional which results in insurmountable stress to the home buyers. 

A 2017 report conducted by Zillow showed that the average U.S. homeowner can end up spending more than $9,000 per year. A good portion of this money goes to the hidden costs of homeownership and maintenance costs. One of the worst experiences for a homebuyer is falling in love with a house only to find that the cost of living there overextends your ability to actually afford it. In this article, I am going to list the main types of hidden costs associated with buying a home so you be fully prepared when purchasing your home. 

Please Note: 

Homeownership is one of the best experiences you’ll ever have in your lifetime. It is a special moment, not only for you but your generation. And even though it has so many perks, there are unexpected costs you have to deal with, this presents one of the hurdles to homeownership. 

Most of these hidden costs are beyond our control, for instance, the taxes or the homeowners association fees (HOA). 

So, what are these hidden costs of homeownership that you should be aware of? 

Property Taxes

This is one of the costs that takes so many people by surprise. Part of the reason is that they are not a standard fee. Property taxes vary from state to state and from city to city. In addition, they are not stagnant because depending on the city you are in, these taxes might increase or decrease. If you want to know the property taxes by county, the Tax Foundation has a great resource for that; the tax data lookup tool

In some cases, you might find that the property taxes may be higher than they should be, especially when compared to other similar properties in your neighborhood. Though it is rare, it happens and if you suspect something like that, it is advisable that you hire a lawyer to help you grieve your tax assessment. If that’s expensive for you, do it yourself. 

The effective rate nationwide for the property taxes is 1.1% of the value of the home. But as mentioned before, the rate will vary but ranges from an average under 0.4%  in some states like Alabama to about 2.2% in some others like New Jersey. In Ohio, the property tax rate is 1.57%. As a hidden cost of homeownership, property taxes are guaranteed payment in perpetuity. Though there isn’t much you can do about them, there are proven strategies to lower them

Closing Costs

When talking about the closing costs, most first-time homebuyers often assume that these hidden costs of homeownership are standalone. What they do not understand is that the closing costs include a wide range of fees that have to be paid at the end of the transaction, that is, closing. 

Closing is the last step in the mortgage process and some of the closing costs you should be expecting include; 

  • Cost of inspection. 
  • The attorney’s fees. 
  • Recording costs. 
  • Appraisal fees. 
  • Surveyance fees. 
  • Lender application fees. 
  • Title insurance fees. 

This list is not ‘all-inclusive” but it will give you a good idea of what to expect. All closing costs factored in, you are looking at an average of 2-5% of the home’s value. And just like the property taxes, the closing costs will vary from state to state. This is where the realtor comes in handy. Make sure that you are asking your realtor all the questions, make sure to go over what will be included in the closing costs and this will help you avoid any unpleasant surprises. 

During the loan estimation, your lender will give you just a ballpark figure of what your total closing costs may look like. However, this is not the final figure!

Maintenance fees

Practically, you should set aside at least 1% of your home’s value each year to go to the home’s maintenance. The maintenance fees will also cover the repairs or renovations that your home may need especially where you are buying an older home.  

Remember to also account for every penny that goes to renovation as this will help you build a budget. However, in a situation where you aren’t planning on getting started with the repairs as soon as you get the keys to your home, you should start building an emergency fund to prepare for the unexpected home repairs later. 

This is a hidden cost of homeownership that you can survive for a while without but it is important to factor it into your budget.  Again to know exactly how much you need to budget your hidden costs, work with your realtor and home inspector who will help you estimate what routine jobs might cost in your neighborhood. 

Homeowners Insurance

This is a hidden cost of homeownership that you should be prepared to have especially if you are getting a mortgage. While it is not an unexpected expense, it catches most people off guard. Most banks and mortgage companies require insurance before they can issue you a loan. In most cases, the insurance premiums will be factored in in your mortgage payment, and just like the property taxes, the insurance premiums will be paid from your escrow account. 

It is important to note that the premiums will vary. They can rise annually and this happens most of the time. 

Typically, the homeowner’s insurance will not cover the acts of nature, which means, you may end up purchasing extra coverage against natural disasters like floods, hurricanes, and earthquakes. Unfortunately, this insurance against natural disasters can be very expensive. 

Bottom Line

In your lifetime, a home is the best gift you can ever get yourself. It is the most rewarding purchase ever, but the hidden costs of homeownership might cut short your joy. As much as possible avoid getting caught off guard which means, before actually purchasing your home, be sure to learn about these hidden costs of homeownership.