It’s no secret that buying a home is expensive.
When you start thinking about a home purchase, the purchase price is usually the first thing that comes to mind. But, a $500,000 house isn’t a $500,000 house.
In many ways, it actually costs far more, and while real estate has, historically, been a solid investment, the costs of owning a home can extend far beyond the purchase price.
Here are 10 hidden costs of homeownership to consider before you make your next home purchase.
1. Closing Costs ~2 – 6% of the purchase price
Closing costs are additional fees and charges you have to pay when you buy a home. These fees often add up to 3-4% of the purchase price (and, in some cases, even more), making your upfront investment in the home even more significant.
2. Interest Charges
Say you’re buying a $500,000 house. You put down 20%, or $100,000, and take out a 30-year, $400,000 mortgage. Your interest rate is 6%, which, historically speaking, falls below the all-time average of roughly 7.75%. Not too bad, right? Well, that depends on your perspective.
In this exact scenario, you’ll pay $463,483 in interest charges alone over the 30-year period. Before you account for any other costs, the purchase price and the cost of interest mean you’re paying $963,483 for your house. Add in the closing costs, annual property taxes, utilities, cost of maintenance and more, and that $500,000 house easily becomes one that costs well over $1,000,000.
Keep in mind this doesn’t paint a complete picture, since you can reduce the interest you pay by increasing your principal payments and getting ahead on your mortgage. It also doesn’t account for the fact that by taking a loan, you could be putting your cash to work elsewhere, like the stock market, and generating a return of 6%, 7%, or more, in addition the potential for your home’s value to appreciate over time.
3. Mortgage Insurance
Some home loans come with mortgage insurance (yes, even if you put down 20%). For conventional loans, you’ll only pay private mortgage insurance if you put down less than 20%, and only until you establish enough equity in the property (private mortgage insurance will drop off automatically once your loan-to-value reaches 78%).
4. Property Taxes ~$4,500 on average
Property tax varies by location, but unfortunately, every single state charges property taxes. If you own a home, you’re going to be on the hook for some property tax. To find the tax bill for the current year on a given property, visit the property appraiser’s website in the county where the house is located. If you just want a rough estimate, the national average across all states will be around 1% of the property’s current value.
5. Maintenance & Repairs Budget 1-2% of the home’s value each year
When you own a home, maintenance costs can be extremely unpredictable. One year, you might find yourself spending next to nothing on maintenance, while the next could cost you $20,000. The best way to approach necessary repairs is to create an emergency fund dedicated exclusively to home maintenance. Set aside 1-2% of the home’s value each year and keep that money in a separate account. Alternatively, you can take out a home equity line of credit (HELOC), which gives you access to cash when you need it — just remember that you’ll have to pay that money back, along with interest charges.
6. Utilities ~$350 – $400
Utilities are often easy to overlook, though they can easily add up to hundreds of dollars on top of your monthly mortgage payment. The cost of utilities varies by location, weather, the size of the home, and your usage habits. If you’re considering buying a home, you can always ask the previous owner (or their real estate agent) what the utility bills looked like over the last year.
7. Homeowners Insurance (and Flood Insurance, where applicable) ~$2,000 annually
Property insurance costs depend on the insurance carrier, property, coverage options, and other factors like your claims history and even your credit score.
If you live in a federal flood zone, you may have to purchase flood insurance in addition to your standard homeowners insurance policy.
8. Lawn Care & Landscaping ~$1,000 – $2,000+ annually
If you enjoy mowing the lawn and gardening, you can maintain your home’s grounds more affordably, though you’ll have to invest plenty of your own free time.
For those who prefer to leave their landscaping to the professionals, costs can easily range from a few thousand dollars to upwards of $10,000 for larger yards or more intricate projects.
9. Snow Removal ~$100 – $500+ annually
If you live in Hawaii, Florida, or any region that doesn’t have cold winters, you don’t have to worry about snow removal. However, in many parts of the U.S., such as New England and the Midwest, snow removal is just a normal part of life. Though snow removal costs aren’t terribly significant, they are an important consideration for homeowners in areas with harsh winters.
10. Upgrades
At some point during your time as a homeowner, you’ll want to make certain upgrades that (hopefully) improve your quality of life. Though you might not need a new countertop in your kitchen, swapping out those Formica counters for stylish quartz countertops may be an expense you’ll happily undertake.
Buying a home can be a rewarding experience and a worthwhile investment, but it’s important to recognize the costs before you commit to owning property.
Every home will have different expenses, and as the owner, your lifestyle, choices, and preferences often dictate how high those costs go.