5 Costs First-Time Home Buyers Need to Be Ready For
When you're buying a home for the first time, you know you'll have to start making mortgage payments. But aside from the principal and interest that you'll now be paying on, there are other costs that are likely going to start coming out of your bank account -- and it's important to be prepared for them.
To ensure you aren't caught off guard, here are five big expenses you should know about before buying your first home.
1. Closing costs
Closing costs add up to around 2% to 5% of your home's purchase price. In June 2023, the typical starter home sold for $243,000. This means a first-time buyer buying a typical entry-level home could need to cover closing costs totaling as much as $12,150. That is a lot of money to have to bring to the closing table.
Borrowers can sometimes roll these closing costs into their loan. But this would mean borrowing more or accepting a higher interest rate, both of which would make your loan more expensive over time. Instead, you may be better off just saving for a little longer in a high-yield savings account until you can pay for your closing costs out-of-pocket.
2. Property taxes
The median property tax paid in the U.S. is around $2,971, and the effective property tax rate nationwide is 1.11%. You'll have to pay these property taxes every single year, and they will likely increase over time.
You must be prepared for this added expense on top of your mortgage principal and interest. Many mortgage lenders require you to pay part of your property taxes each month, including that amount in your mortgage bill so it can be put into a special escrow account. That's an account the lender maintains on your behalf; it collects the money into the account and then pays property taxes from it when they come due.
So, when you calculate how much house you can buy, be sure to take monthly property tax payments into account.
The average cost of homeowners insurance is about $2,305 annually. This is another big sum of money that first-time home buyers must prepare for.
Buyers are typically required to secure insurance before closing. They may also have to pay their insurance premiums as part of their monthly mortgage payment so this money can be put into an escrow account as well. This also must be factored in when estimating how much home you can afford.
4. Home maintenance and repairs
You should typically budget about 1% of your home's value for maintenance each year. That means you'd be looking at another $2,430 if you bought a typical starter home.
You won't necessarily spend that amount each and every year. But you should put it into savings either way. That way, when one really big expense comes along like a new air conditioner or a new roof, you'll have the funds you need to pay for it and won't have to go into debt.
5. Moving expenses
Finally, you'll have to think about what it will cost you to move into your new home. This could cost thousands if you hire movers. Even if you don't and you handle the move yourself, you'll still have to pay for things like boxes and a moving truck.
Be sure to consider all these costs and save for them before you move forward with buying a house. Otherwise, you could end up staring at an empty bank account and struggling to afford the home you thought was a dream come true.
Source: The Ascent