Review all expenses
Most homebuyers are aware of the obvious expenses – mortgage payments, home owners insurance and taxes. But utility bills, repairs not made by the previous owner, and making aesthetic updates can add up, too. Some types of loans require private mortage insurance. Don’t drain your finances because you weren’t aware of these surprises.
Here are suggestions to prepare for these common hidden costs that you might encounter.
Home repairs and cosmetic updates
You’re likely to find things you must fix or updates to make the home yours, depending on the age and condition of the home. Research shows that 65% of home shoppers are looking for a turn-key home, not one considered a fixer-upper. But additional research found a typical home could require almost $30,000 worth of upgrades or repairs. The average millennial expects to pay about half that in making their new home ready to move into. That’s a significant difference.
Unless you live high upcountry, heat isn’t too much of an issue. But air conditioning systems — the most expensive project, according to the national average — could cost more than $3,500, especially in Hawaii. Evaluating, repairing or replacing this system can quickly eat up a substantial chunk of your budget.
Appliances have a lifespan, so know the age of the appliances that are typically sold with the home. If the home is new, the appliances are usually new and under warranty. But if you’re buying a previously owned house, you may find it necessary to replace the appliances.
If you opt for basic models, it will still cost several hundreds of dollars. Even a moderately-priced refrigerator is going to cost a couple thousand dollars. And then you may have to pay for its delivery and installation. Add options, or changes to electrical wiring or plumbing, and you could be looking at thousands of dollars to replace a refrigerator.
First-time buyers used to having some utilities included in their rent payment may be surprised by the cost of these necessities, so be sure to plan for them. These could include:
- Garbage pickup
- Natural gas or propane
- Sewer bill or Septic repair and maintenance
The larger the home, the higher the cost to cool it, especially if the property does not have solar. If the windows or insulation are older, they will also be less energy efficient, so it’s important to know the condition of these items because they could cost a lot to upgrade.
As a rule of thumb, you can expect to pay about $35 a month for each $100,000 in home value for homeowners’ insurance. But the amount will vary depending on your location, the type of coverage and discounts you qualify for, and the insurer. If you live in an area prone to flooding, you will be required to purchase a separate flood insurance policy. Be aware of the coverage you will need to adequately insure your home.
Homeowner association fees
Homeowner associations (HOAs) commonly found in condominium or planned single-family communities, are run by a board of homeowners. HOAs are non-profits charged with establishing rules and providing enforcement. They also arrange for basic services, including maintenance and repair of amenities such as pools, roads, and landscaping. If you purchase a property with a homeowners association, you will be required to pay dues for these services either monthly or annually.
HOA fees can vary widely depending on the needs of the community. Associations that want to develop additional amenities, such as new park, or one that has neglected maintenance, can raise the dues or levy special assessments to the homeowners. It is a good idea to know what projects your HOA is considering and plan your budget accordingly.
How to prepare for hidden costs
It’s wise to identify the amount of money you will put down on your purchase and determine closing costs and needed improvements. Then figure in a reserve of 1 to 4% for hidden costs.
- The home inspection will give you a place to start when figuring how much money you might need to make repairs. Before making an offer, have an inspector look the home over. An inspector can assess problem areas, such as electrical systems, plumbing, structural integrity, roof condition, all costly repairs, or upgrades to make. Some inspectors can even provide price estimates for these things. Knowing what to expect ahead of a purchase can help you plan accordingly.
- You should ask yourself what must be completed right away, what can wait, and what you could do yourself to save money. But be realistic. Some projects may be out of your area of expertise and take longer which might prove a hardship if you are working or taking care of your family.
- Your inspector can test the appliances if you request it. Ask your real estate agent to get the age of the appliances and typical costs of the utilities for the year. Knowing the age and condition of your appliances and seasonal costs can help you budget your expenses.
- Check out a home warranty, which is a short-term service contract (usually about a year in duration) to help the homebuyer cover costs of repairing or replacing some mechanical systems. It can give you peace of mind should anything break down during your first year. Cost of a home warranty is usually between $300 and $800, and the seller may even be willing to pay for it, or you can buy one yourself.
- Be honest about purchasing a home with a large yard. Do you want to maintain it? Purchase yard tools or a lawn mower? Or will you hire a lawn service? Whatever you decide, include those costs in your budget.
When planning your expenses, your list doesn’t have to be exhaustive. However, it does need to be close to your total costs and what you want to spend. Then you can decide if the home you want to buy will fit into your budget.