Unexpected Costs When Buying Your First Home
First-time home buyers know about saving for the down payment. However, you will face other costs when you buy your first home. These costs can be significant. So, it’s crucial that you understand them and prepare for them before you sign any contracts.
Be prepared for the following costs associated with buying a home:
1. Earnest Money
Earnest money is offered when you submit an offer on a home. It shows the seller that you are a serious buyer. If the offer is accepted, the earnest money is applied to the down payment and closing costs. If the offer is not accepted, there are many contingencies in place to make sure the money is returned to you. However, you are working with contracts. Be sure to discuss the details with your real estate agent before putting down earnest money. There may be some situations in which you forfeit the earnest money. Earnest money is typically one to two percent of the total purchase price.
2. Inspections and Appraisals
Inspections and appraisals are absolutely necessary when buying a home. Home inspections can prevent unpleasant surprises like leaky pipes or a termite infestation. These issues are typically used for bargaining purposes before closing. You can negotiate to have the seller repair the defects or offer a discount on the sales price. As the buyer, you will most likely pay for the inspection. It’s a good idea for you to be present during the inspection.
Appraisals give you an accurate market valuation to ensure you are not paying too much. Buyers typically pay for the appraisal, although sometimes you can negotiate this with the seller.
3. Escrow Fees and Accounts
Escrow officers act as the independent third party to make sure closing processes go smoothly. The escrow fee is usually split between the buyer and seller. In addition, your lending institution may require a separate account for property taxes and insurance. The costs will be estimated and calculated into 12 monthly payments. That amount will be added to your monthly mortgage payment.
At the end of the year, your lender will adjust the amount based on the actual tax and insurance bills. If you paid too much, you will receive a refund; if you didn’t pay enough, payments will generally be spread out over the next year. If you decide to go without the escrow account, you will be responsible for the two payments yourself.
Generally, insurance falls into one of three categories: homeowners’ insurance, mortgage insurance, and supplemental insurance. Homeowners’ insurance helps pay for repairs, covers personal belongings, and protects you against liability claims. Many mortgage lenders require homeowners’ insurance. However, if you put more than 20% down on your home, your mortgage lender may forgo that requirement.If you are required to purchase mortgage insurance, the costs will be added to your monthly mortgage payments, your closing costs, or both.
Supplemental insurance may be a good idea if you live in a flood- or earthquake-prone area, as those are generally not covered by standard homeowners’ insurance policies.
If you’ve been renting a home or apartment previously, you may have had to pay connection fees for electricity or gas. When you own your home, you will be responsible for paying setup fees and monthly bills for every utility — including electricity, gas, water, sewage, trash, recycling, TV, and the Internet. Utility companies will check your credit history and may require you to pay a deposit or get a letter of guarantee from someone who agrees to pay your bills if you cannot.
6. Home Improvements, Repairs, and Upgrades
Even if the home sellers cover major repairs, you may still find yourself with the expense of a new HVAC system, roof, or water heater after you close. Other expenses will be choices of course like upgrades to cabinets, flooring, or walls. Make a list of improvements and categorize them by need. A new HVAC system may be essential, while cabinetry and other upgrades can wait until. If you prioritize the repairs, you can keep costs low, not to mention recoup some of the investments if you sell the house later.
7. Appliances and Furniture
Many home sellers take their major appliances with them. Be sure that this is clear in the contracts. Be prepared to buy a new refrigerator, washer and dryer, and dishwasher. You may need to buy an oven and stove as well. Things like ceiling fans, light fixtures, and AC units — appliances you might consider “fixed” — will not necessarily be there for you when you move in unless they are explicitly part of the contract.
Now that you’re prepared for all the costs that go into your first home, get ready to sign that contract and move into your very own home!