As a first time homebuyer, budgeting for all the expenses associated with a home purchase is an integral part of the home-buying process. There are more costs to consider than just your down payment and mortgage. Making sure you are prepared for closing costs, property taxes, utilities, and post-purchase renovations is a key factor in being truly prepared to purchase your first home. Here we’ve compiled a list of expenses first-time homebuyers need to make sure they include in their budget.
If you plan to finance your home purchase you will have to pay a down payment. Down payments generally range anywhere from 0-20% of the purchase price, depending on what type of financing you acquire. A standard financing option will likely include a down payment of 5-20%, whereas an FHA loan may go as low as 3.5%. In the years since the housing crash of 2008, zero down payment loans are rare with the exception of physician mortgage loans.
Finding and working with a trusted local lender is the best way to fully understand what financing option will work best for you. Your lender can help you determine how much to put down to balance your payment factors of the overall monthly payment, cash reserves, and mortgage costs. It is generally recommended to put down at least 5 percent. In a competitive market, an offer with a low down payment mortgage financing may be considered subordinate to a higher down payment offer.
It is important to understand that in Michigan property taxes on a home you are looking at can be much lower than what you will actually pay post-purchase. Property taxes only go up by the rate of inflation, capped at 5%, each year but once a home is sold the taxes are reset to the assessed value, this is known as a pop-up tax.
The Michigan Department of Treasury provides a property tax estimator to help prospective homeowners understand what their taxes will likely look like post-purchase. Your lender will also ensure that you know what your property taxes will be. Good lenders and real estate agents make sure to go through, in detail, what the holistic costs of homeownership will be, but it is never a bad idea to enlist the help of a financial planner or accountant to act as another set of experienced eyes on your financial situation.
Depending on your tastes and the state of the home you are purchasing, you will need to budget for initial post-purchase renovations. Common renovations new homeowners often do right off the bat include painting, putting in new flooring, updating appliances, cabinetry, fixtures, and window treatments.
Often times sellers paint their home in neutral colors before they list to make it look more open and fresh. Many buyers will want to transition to colors that match their tastes. It makes sense to get an understanding of the costs of these renovations before making the decision to purchase homes that will need these updates. Your real estate agent and home inspector can often give you accurate estimates of these costs as well as refer you to trusted vendors that they and their clients have used in the past with good results.
After the initial renovations are done, you will want to budget for yearly home maintenance and upkeep. It is recommended that you budget between 1-2% of the purchase price for yearly home maintenance. This means that for a $250,000 home, you would save between $2,500-$5,000 for yearly maintenance and repairs if possible. Condo communities often include exterior maintenance in their HOA fees, whereas most if not all maintenance fees associated with a single-family home will be yours to cover.
Common exterior maintenance costs for single-family homes include yardwork/upkeep, landscaping, gutter cleaning, roof repairs, snow removal, and chimney cleaning. Common interior projects include window cleaning, carpet cleaning, plumbing, and electrical work.
These costs will obviously vary year to year, but having a “rainy-day” fund for unexpected maintenance projects is highly recommended. Whether it be a weather-related emergency, such as frozen pipes that burst, or a project related to the age of the home, like replacing the HVAC system or roof, it is important to have funds put away for both expected and unexpected yearly maintenance.
Utility costs can really surprise the first time homebuyer. The nationwide average is $2,964 a year, but this varies greatly depending on where you live and the size and age of the home you buy. In a cold location where the heat runs 9-months out of the year, as it sometimes does in Michigan, you may need to budget more for utilities.
Older homes will also cost you more. Not only do they have appliances that are less energy-efficient than newer homes, but they often suffer from drafts and insulation issues that you won’t have to worry about in new construction. When buying a home this is something to keep in mind. The price tag on new construction may be higher but once you factor in utilities, renovations, and maintenance you may actually be paying a lot more in a year for an older home, even one that has been fully renovated.
Closing fees include attorney fees, appraisal fees, inspection fees, and document preparation fees. When you are comparison shopping for lenders they will give you a breakdown of the estimated closing costs you will incur. Don’t be afraid to ask your lender and your real estate agent questions about what your closing costs will look like. Good lenders and agents will be upfront and communicate when it comes to helping you understand your costs and obligations every step of the way.
With new construction, many builders will require you to pay seller transfer fees, seller title insurance, and administrative fees. Make sure to get a full list of builder expenses you will be asked to pay before signing a new construction contract.
Lender closing costs on a hypothetical $250,000 purchase with a 3-5% down payment would run about:
Loan Origination: $995.00
Credit Report: $55.00
Tax Service: $81.00
Title Insurance: $737.50
For a total of $2,339.00
If you finance a home purchase you will be required to carry homeowner’s insurance, and you should have it even if you purchase your home with cash. It is recommended that you get a replacement policy versus a policy that pays you the depreciated value of the items lost in an accident involving your home. The national average for an HOI premium is $1,132, but you can save a lot of money by shopping for discounts. You can receive discounts for purchasing a home security system, for working from home, and for bundling your home and auto insurance.
If you live in a flood zone or on the water you may be required to purchase flood insurance as well. If you live in a condo community you may need to purchase a liability rider for personal accidents that occur on your property. These insurance costs are important to ask about and budget for upfront so that you aren’t surprised by an un-planned insurance requirement post-purchase. Good agents and lenders will make you aware of these costs as you are shopping for homes.
Ultimately, understanding the costs associated with purchasing your first home is a burden you do not have to bear alone. By working with the right real estate agent, lender, home inspector, and financial advisors, you can be sure that you are aware of all of the costs associated with your home purchase upfront.
Keep this checklist of expenses in mind during your preliminary planning, and make sure to ask detailed questions to all agents and lenders you are interviewing. Knowledge and experience are key components to look for in trusted advisors in any business, including real estate.