Owning a home is expensive. This is not new information to most, but it is surprising just how expensive it can be. Another surprise is where some of those costs can occur. As a general rule, surprises are not welcome in personal finance. We want to be able to identify the types of expenses that will occur and plan for them. That is why it is so important to understand what you are getting into when buying a home. Here are some commonly overlooked expenses that mess up your budget if they are not accounted for.
Utilities
This is a big one. As a renter there is a great deal of variation on what your rent payment covers. Some tenants pay a rent payment that covers all their utilities. Others pay for them piecemeal or pay some while their rent payment covers others. This is why it is critical to assess what your new home will cost you to actually live in. Let’s say you rent a 1,000 square foot studio apartment in a relatively new building and do your laundry at a laundromat. You plan to purchase a house that is older, is around 2,500 square feet, and you will use a washer and dryer on the premises. It is a safe assumption that your electric and water bills will not be the same as they were in the smaller apartment.
There are many ways you can try to plan for those expenses. When preparing to purchase a home you should be able to get information from the utility companies that service the house regarding average usage. It would also be useful to ask for the high and low usage amounts from a couple of years. This will tell you how high your more expensive bills might be. It can also help you get a handle on heating and cooling costs. Do not simply take the seller’s information at face value. They want to sell the home and may not be entirely forthcoming with the information you need. In addition, this is where a good inspection can be a big help. Locating possible energy drains up front can save you money in the long term.
Insurance
Finding the right homeowner’s insurance is a critical part of the home buying process. Hitting the right balance between getting a policy that covers everything you need and one that is the lowest cost possible is one that takes some research. You will want to compare coverage and prices with several companies because rates can vary widely. Keep in mind when looking at how much coverage you need that your coverage should not be the market value, but the cost to rebuild. You should work with your agent to figure what that cost would be for the home you are purchasing.
In addition to the structure itself, you will want to make sure your policy adequately covers all of your things. Some items such as jewelry have individual limits with normal coverage. You will want to go over that information with your agent to be sure that all of your possessions are covered appropriately. You may have to add additional coverage for some items, and you will want to discuss available “endorsements” that can be added to your policy to keep pace with inflation or any other kinds of extended protections that may be available and of interest to you.
Also, it is a good idea to find out whether your insurance provider offers discounts for combining insurance policies. This is common and may make it cost-effective and convenient to combine your home and automobile insurance policies.
Even if you get the best deal possible, if you went into the process expecting that your homeowner’s insurance would cost you what your renter’s insurance policy did, knowing what all is covered should reveal that this will likely not be the case. It is important to understand that your cost will increase when budgeting so you do not end up with more than you can really afford comfortably.
HOA Fees
When you purchase a new home you may end up paying unexpected fees through your HOA or homeowner’s association. These can be quite high depending on how upscale the neighborhood and the amenities that are provided in it. The fees go to cover upkeep of any commonly shared space within a development. These will be due every month and must be factored in to your budget before you decide to buy. Most commonly they fall in the $200-400 range. It is important to find out exactly what they will be from your real estate agent and the association itself.
There is another HOA tidbit you might be interested to know. If an HOA does not have a significant reserve fund, beware! You can be charged additional fees if a significant expense comes up that the reserve won’t cover. Do your homework in advance so you are not surprised if this happens!
The first step when buying a home in an HOA is to learn and understand all the HOA rules. Make sure the house you are buying is not out of compliance with them. Moving in to a home is stressful enough. Doing so only to find you need to spend unplanned money to get it into compliance with your HOA stinks.
Ask questions about how the HOA fees are increased, how much they have been raised over time, and how much the HOA has in reserve. Also, make sure you clearly understand what your fees cover so that you can calculate if you will still need to cover trash pickup or similar services. Not asking these questions up front is a dangerous game to play and can make you literally pay later on!
Total Cost
Imagine how terrifying it would be to get to the end of your first month in a home only to discover that you’ve made yourself house poor because the HOA fees and insurance were not included in your budget. If you factor in all these additional costs it can dramatically change what you can comfortably afford, and we have not even addressed the added need to plan for maintenance and repairs. Like any other financial decision, you should enter the purchase of a home with all the information in front of you so that you do not end up regretting that decision down the road.