5 Expenses That Shock First-Time Homebuyers

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Americans are an optimistic sort. Take a 2017 study from Bank of The West, which found that 85% of millennials are confident they’ll achieve the American Dream—of which owning a home is a big piece.

Yet, more than half of those surveyed don’t have a plan to actually get there, and once they start on the path, they’re often shocked by how much it costs. Sure, some costs associated with homeownership are predictable, such as your mortgage payment. But many of the ancillary costs of homeownership take homeowners by surprise, including property taxes, insurance, utility bills, and more. U.S. homeowners can spend more than $9,000 per year on these hidden homeownership and maintenance costs, according to a 2017 report by Zillow and Thumbtack.

You don’t want to fall in love with a home only to find out that the cost of living there will overextend you. Here’s a guide to the line items you should be considering so you’re not shocked when the bills start arriving.

Closing Costs

As you close on your mortgage, get ready for a laundry list of expenses, including:

  • Mortgage interest
  • Taxes and insurance escrow payments
  • Lender application fees
  • Attorney’s fees
  • Title insurance (the insurance policy for the deed)
  • Recording fees (paid to the county clerk’s office to record the deed)
  • Any potential real estate tax reimbursements if the seller has paid them up front

All in, you’re usually looking at an average of 2–5% of the total cost of the home, says Rebecca Mason, executive vice president and head of sales at OneTitle, a national title underwriter. Specific costs will vary from state to state—for example, one county might charge $20 per page for recording fees, while another might charge $5.

Your initial Loan Estimate will have a ballpark figure for your total closing costs, but these won't be officially finalized until closing time.

Home Maintenance

In general, many experts use the 1% rule for maintenance budgeting: You should plan on paying at least 1% of your home's value in maintenance costs every year. But that number varies, and Jeremy Wacksman, president of Zillow, notes that upkeep on condominiums or attached townhomes tends to be lower than single-family homes on their own land.

Some of the most common maintenance requests from Zillow and Thumbtack’s study were house cleaning, yard care, gutter cleaning, and pressure washing. Prices do vary widely based on location. Your agent and home inspector can help you estimate what routine jobs will cost in your neighborhood and area, especially when it comes to first-year costs. Sites such as Angie’s List and Thumbtack can also help with estimates.

Property Taxes

Property taxes don’t just vary by state, and they’re not stagnant—they also increase or decrease based on city, ordinances, and even specific neighborhoods. The Tax Foundation has a property tax data lookup tool by county, which you can use when planning expenses.

If you believe your property taxes are higher than they should be compared with other homes in your area, you can hire a lawyer to help grieve your tax assessment (usually for a percentage of the money that person saves you), or you can also do it yourself and save the fees.

Utilities

Utility costs can be as high as property taxes, says Wacksman—running a couple hundred dollars per month or more. Estimates change with climate, local costs, and specific appliances, ranging annually from over $7,000 in Hawaii to just over $4,100 in New Mexico. The national average is just shy of $5,000.

To get a clear sense of what to budget for utilities, ask a friend with a home in the neighborhood you’re considering to give you a peek at their monthly bills, making sure to adjust for the size of their home compared to yours.

Homeowners Insurance

If you’re getting a mortgage, you’ll be required to have homeowners insurance. And even if you pay cash for your home, you should have it anyway. You’re best off buying a replacement cost policy, which will cover the cost of replacing the items that get stolen or damaged in a fire, rather than one that gives you the depreciated value of the items lost.

According to the Insurance Information Institute, the average annual premium is $1,211, and this varies based on your area and the value of your home. You can save yourself a significant amount by shopping around, both online and in person. Ask about what discounts you can get, including premium reductions for security systems, working from home, and bundling coverage for your home with your auto insurance policy.

Finally, be aware of the limitations of homeowners insurance. Policies tend only to protect your home and possessions within, but if you’re buying a condominium, the co-op might require a liability rider for accidents on any shared property. And if you’re in a flood zone or area with a high risk of earthquakes, you’ll need additional protection.

The Bottom Line

A home is one of the most rewarding purchases you can make, but it definitely comes with its share of unpredictable costs. As much as possible, you want to avoid being caught by surprise. Before you make a purchase, make sure you have an idea of what you're getting into—and whether you can afford it.