When thinking about your budget for buying a house, you probably focus on the down payment and monthly mortgage payment. But, as a future homeowner, these aren’t the only costs you should factor in.
When it comes to buying a home, many of the expenditures related to homeownership don’t come with price tags. Costs will vary and are ongoing throughout your time as a homeowner. And while some may only impact your wallet once, others you’ll pay repeatedly — whether annually, monthly or from time to time as needed. Having an idea of what expenses to expect can help prevent sticker shock — and gives you the ability to prepare for them whenever they do come your way.
Let’s examine what the total cost of homeownership can look like.
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To get a head start on calculating your expected costs, you’ll first want to start with the average price of a home in your state or desired neighborhood. This Home Value Index can help you find the median value of a home in your area.
One-Time Homebuying Expenses
The golden rule used to be that down payments must be 20% of the purchase price, but that’s no longer the only option for home ownership. Today, a variety of financing options and programs geared toward low- to moderate-income borrowers allow for buyers with a wide range of budgets to access they mortgages they need.
For example, HomeReady mortgages, a type of conventional loan offered by Fannie Mae, allow qualified first-time and repeat buyers to purchase a home with as little as 3% down. So if you’re buying a $150,000 house, for instance, you could make a down payment as low as $4,500 with a HomeReady mortgage, available through Ally Home. Plus, this type of mortgage allows for more flexible payment requirements, making homeownership feasible for those who may not have enough cash on hand to cover a traditional down payment.
If you can, it can be a smart move to put more money down up front, since you’ll pay less in interest charges in the long run. But if that’s not possible, it doesn’t mean your dream of homeownership is out of reach. HomeReady mortgages and certain loans offered by the Federal Housing Association (FHA) provide mortgages with reasonable rates and down payment options to first-time homebuyers.
Note: When you make a down payment of less than 20%, your lender might require you to get private mortgage insurance (or PMI).
Your lender will likely require you to get a home appraisal if you’re getting a mortgage to purchase your home. An appraisal will cost you $300 to $550 on average and you will receive an unbiased estimate of the property’s value (based on its condition, location, and size; current market trends and recent sales of similar, nearby homes).
A home inspection examines the physical condition of the house, so you can feel confident you’re aware of any problems before the keys are handed over to you. (It can also clue you into future maintenance costs. There’ll be more on these costs later.) Expect to pay around $300 for an inspection of a 2,000 sq.ft. house, but the expense could save you thousands. That’s because it could uncover issues with the home’s mechanical systems, physical structure or appliances — giving you the ability to renegotiate the selling price or have the seller fix the problem.
Finding a home that meets all your #housegoals and being approved for a mortgage is incredibly exciting. But the final step towards homeownership — the closing — can be daunting and full of lots of emotions. So, we don’t want you to get caught off-guard by the closing costs, which can be 2% to 5% of the price of your new home. Referencing our earlier example of purchasing a $150,000 house, this means you could be responsible for another $3,000 to $7,500 at the closing. Typically, there are three types of closing costs:
- Lender fees, which may include the origination, application and processing fees, discount points and underwriting fees.
- Third-party fees that can include costs for title search and title insurance, attorney fees, recording fees and tax certification. With some home sales, appraisal and inspection costs are included in your closing costs, but not always.
- Additional fees might include private mortgage insurance (you may also be able to pay this monthly in your mortgage payment) and an escrow account.
Costs of Being a Homeowner
|One-Time Costs||Ongoing Costs|
|Down payment: 3% to 20% of home price||Mortgage payment: varies|
|Appraisal fee: $300 to $550||Property tax: ~$2,000/year|
|Inspection fee: $300||Homeowner’s insurance: ~$1,200/year|
|Closing costs: 2% to 5% of home price||Private mortgage insurance: varies|
|Homeowner’s association dues: $100 to $700/month|
Note: The provided estimates are examples and are subject to vary based on factors mentioned throughout the article.
Ongoing Homeownership Costs
The expenses that are required to close on a house aren’t the only expenses you’ll have as a homeowner. Some of the following costs are consistent, while others may pop up on occasion.
When you take out a mortgage loan, you have the ability to repay it over a predetermined amount of time (typically 15 or 30 years). Payments are usually made monthly — a portion goes towards your principal and the remainder is interest charges. Some lenders require you to pay your property taxes and your homeowner’s insurance (more on these expenses momentarily) as part of your mortgage payment. Find out all the cost components that make up a typical mortgage payment and get an estimate of your monthly mortgage payment with our calculator.
When you purchase something in a store, you usually have to pay sales tax. And when you buy a house, you’ll be responsible for paying property tax, too. This tax is levied by your local government and is usually based on your home’s value and location. Funds raised through property taxes typically go towards things that benefit your local community, such as public schools, parks, and roads. This cost varies greatly based on where you live, but a typical homeowner pays around $2,300 a year in property taxes.
Home insurance is like a bike helmet. On most rides you won’t have to depend on it, but the one time you fall off your bike, it could save your life. Even if you think you don’t need home insurance, many mortgage lenders require you to get it. There are two main types of homeowner’s insurance: dwelling and personal property insurance. Dwelling coverage protects your house and personal property covers the items inside your house. The price fluctuates based on your level of coverage and where your property is located. But on average, homeowner’s insurance costs around $1,200 a year. When deciding on how much coverage to purchase, consider how much it would cost to rebuild your house instead of looking at how much your house is worth.
Private Mortgage Insurance
As mentioned earlier, under one-time expenses, when you make a down payment of less than 20%, your lender may require you to get PMI — and if and you don’t pay for this coverage in full as part of your closing costs, you will likely have to pay it monthly. Then once you have 20% equity in your home, you may be able to cancel it.
Homeowner Association Dues
If you buy property in a condominium or gated community, you’ll likely have to pay homeowner association (HOA) fees. This expense will typically run you between $100 and $700 a month, with the average being about $200 a month. In exchange, you’ll receive home improvements and maintenance (for example, replacing your roof or weekly lawncare could be covered) and upkeep of any shared space, like a pool, gym, or community center.
Even if you don’t buy what’s referred to as a “money pit” or a “fixer upper” — a house with significant repair needs — all houses need maintenance and upkeep at some point. (Yes, even those that are currently in tiptop shape.) Your contractor or home improvement pro might offer Ally Lending as a financing option for home fixes, but it’s smart to include maintenance costs as part of your annual home budget. In general, you can expect to spend about 1% of your home’s value safeguarding your property each year. Many popular property upgrades are affordable — recent reporting found that many homeowners have completed projects for less than $2,000 — and some even boost your home’s value (which could lead to a higher sale price should you decide to move).
Utilities may not be top of mind when it comes to homeownership costs, but whether it’s your electricity, water, air conditioning, heat, or wifi — they are hard to live without. Rule of thumb advises budgeting around $400 a month for utility bills.
Total Cost of Home Ownership
We understand that the amount of money you need to be a homeowner isn’t as clear as other big purchases you might make in life. But once you make it past the number crunching, you’re well on your way to being a homeowner.
While the total cost of owning a home may seem to add up, don’t forget that it could be a great investment as you can build equity in your home on an annual and even monthly basis. Equity that you could benefit from in a variety of ways, especially if the value of your home increases.
With the resources provided, you should feel empowered to make the right financial move when you’re thinking about purchasing a home.
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