(From the Financial Literacy Blog) – Buying a home is often one of the biggest financial decisions you can make. The process of becoming a homeowner can take a great deal of patience and fiscal commitment, but in the end, it’s an incredibly rewarding milestone to achieve. However, it’s important to remember the total cost of buying a home encompasses more than just your down payment and monthly mortgage. Here are the often overlooked and unexpected costs of buying a home.
Typical utilities include electricity, water, internet, heating, cooling, and waste management. If you’ve ever rented an apartment before, you’re likely familiar with having to pay for utilities each month. After purchasing a home, you might see an increase in your utility costs. Your landlord may have previously covered the bill for some of your utility expenses or you might have split the overall cost with other tenants. Recent nationwide reports suggest the typical U.S. family spends an average of $2,060 per year on home utility bills. Be sure to factor in utility costs when determining whether you can or can’t afford to purchase a home. If you want a better idea of what the costs will be for a home you’re interested in, request a copy of previous bills from the real estate agent or former resident.
Your home is far more than a roof to sleep under. In many cases, a home is one’s most valuable asset—an asset that most can’t afford to replace out-of-pocket in the event of a total loss or disaster. Homeowners insurance helps protect your asset. Additionally, most lenders require that you have insurance on your home, as it safeguards them (as well as you) against financial loss. Make sure you add in the cost of protecting your home when putting together your monthly budget. The average nationwide homeowner’s insurance premium in the U.S. is $1,211 per year. Also, make sure you know exactly what is and isn’t covered by your insurance policy. Would the insurer pay out what it would cost to repair or rebuild your home today or would they pay what your home is worth, minus depreciation? For example, if a tree fell through your house and destroyed your bed, the type of insurance you have would pay out differently than others. With a replacement cost policy, the insurer would pay whatever it costs to replace the bed. However, with a cash value policy, the insurer would only pay for what the bed is worth today. If your bed is quite old, it could be valued at much less than what you originally paid.
Beyond your mortgage, down payment, and insurance, it’s important that you also remember to factor in property taxes. The cost of your taxes will vary depending on where you live and the value of your home, and are usually paid directly to your mortgage lender or local tax office. If paying through your lender, you’ll likely be making a monthly payment. If paying at your local tax office, you’ll usually make two payments each year. A typical Maine resident will spend $2,435 per year on property taxes. Make sure to budget for this ongoing, recurring cost, as you will always need to pay property taxes.
Maintenance and Repair
As a renter, your landlord was likely responsible for regular maintenance and repairs. If your furnace stopped working, you could call your landlord and they would coordinate making the repair at no extra cost to you. As a homeowner, though, it’s up to you to fund maintenance and repairs. According to the one percent rule, you should set aside one percent of your home’s value each year for home maintenance. If your home is valued at $200,000, you should be setting aside $2,000 to cover any repair costs.
If you have any questions about buying your first home, reach out to your local credit union to see how they can help.
WMTW News 8 Coverage
Jen Burke, the League’s Public Affairs & Communications Manager, discussed this topic in a recent interview with WMTW News 8.