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Setting a Budget for Your First Home? Know These Uncovered Costs of Owning and Purchasing

Tuesday, July 26, 2022   /   by Laura Larson

Setting a Budget for Your First Home? Know These Uncovered Costs of Owning and Purchasing

Before you start looking for a home, is the best time to obtain an idea of the expenditures associated with home ownership.

Although the majority of potential buyers are aware of major expenses like mortgage payments and property taxes, there are also lesser expenses like homeowner's insurance, energy costs, and maintenance that go toward the overall cost of homeownership. Before you start buying, consider these to assist avoid unpleasant shocks that deplete your funds.

Here are some typical "hidden costs" that you might encounter and some tips to be ready for them.

New Appliances
Appliances are no different from other household items in having a lifespan. The appliances in a newly constructed home should be brand new and covered by a guarantee. Depending on the age and condition of the appliances in a resale home, you may or may not need to replace or repair them.

For the most basic versions, the majority of appliances will cost you at least several hundred dollars. A replacement refrigerator may cost thousands of dollars if bells and whistles are added. Additionally, you might be required to pay for installation, which can be expensive if it calls for modifications to the plumbing or electrical system.

Utility bills
If you’re a first-time buyer, the cost of utilities could surprise you, especially if your previous rental home included utilities.

For people in urban areas, utilities could include:
- Water and sewer
- Garbage pickup
- Electric
- Natural gas
- Cable
- Internet

Rural utility costs could include:
- Water
- Septic repair and maintenance
- Garbage pickup
- Electric
- Propane
- Wood or wood pellets for heat
- Internet

Larger homes are likely to cost more to heat and cool, and older homes may be less energy efficient unless they’ve had new windows installed and/or the insulation upgraded.

Home insurance
Your location, the kind of coverage you choose, any discounts you may be eligible for, and your insurer will all have an impact on the price of your homeowners' insurance. In general, you should budget $35 per month for every $100,000 in home worth. For instance, if your house is worth $300,000, your monthly premium for basic coverage will be around $105 per month. The price will probably be greater in risky places.

You may want to — or, in the case of flood insurance, you may be required to — purchase a supplemental policy because rebuilding or repairs after an earthquake or flood are typically not covered by regular homeowners' policies. If you’re buying with a mortgage, the lender will typically roll the cost of insurance into the monthly mortgage payment and pay the premiums on your behalf.

Homeowner association fees
Homeowner associations, sometimes known as HOAs, are nonprofit organizations that can set and enforce regulations, provide necessities like water, and take care of the upkeep and repair of neighborhood amenities like swimming pools, roads, and landscaping.

HOAs are frequently found in condominiums, townhomes, and planned single-family home communities. They are managed by a board of homeowners, and dues are typically assessed monthly or yearly. Dues might change based on the requirements of the community and range widely. For instance, an association may increase dues or levy special assessments if it has neglected upkeep or wishes to create something, like a new park.

How to prepare for hidden costs
A good place to start is to determine how much you intend to put down on the purchase, and then see how much you’re prepared to spend on closing costs and improvements. A good rule of thumb is to have 1-4% of the home cost reserved for hidden costs.  

Look to your home inspection for a preview of what to expect. The best way to get a handle on possible costs for repairs and upgrades is to have a home inspected before you make an offer to buy it. A good inspector can assess electrical systems and plumbing, structural soundness, and the condition of the roof — and some inspectors can offer price estimates for various repairs. Even seemingly small repairs add up, so knowing what your house may need in advance can help set expectations for your wallet. Once you have a handle on what repairs are needed, you can factor them into the cost of the house to determine the true cost of owning it, and compare the price to other homes that might not need as much work.

Plan for updates and repairs. Think about what things would have to be done immediately, what could wait, and — if you’re handy, what you might be able to do yourself. Be realistic. Some home projects, such as painting the outside or remodeling the kitchen, can take a long time when you’re working and/or tending to your family.

Get to know your appliances. You also should ask your inspector to test the appliances during the home inspection and ask your real estate agent to get the age of the appliances from the seller, along with the typical cost of utilities in the summer and winter months.

Research home warranties. A home warranty — which is a short-term service contract that helps home buyers cover the costs of repairing or replacing certain mechanical systems and applies during the first year of ownership, can take away some of the financial uncertainty. Depending on the level of coverage, home warranties typically cost between $300 and $800, and can usually be paid monthly or in a lump sum. You can ask the seller to pay for one or buy one yourself.

Factor in HOAs. Since HOA dues are fixed for the year, they should be easy enough to figure into the budget. To get a sense of how stable those costs are likely to be long-term, ask for a copy of the HOA’s most recent three annual financial reports to see whether it is spending money on routine maintenance. HOAs that kick the can down the road may end up with expensive projects that require special assessments or hefty dues hikes.

Add up costs for maintenance. If you’re contemplating a home with a yard, do a cold-eyed assessment of how much time and money you need and want to spend maintaining it. If you don’t want to buy lawn tools or prefer to hire someone to do it, that is in your budget.

Bottom line
Your list doesn’t have to be exhaustive, but it should get you close to what you’re prepared to spend. Having that monthly cost in mind can help you determine whether the home you want to buy fits your budget.