The Hidden Costs of Buying a Home
Buying a home is a big milestone, and for many it’s a key part of the American Dream. But, while the listing price gets the most attention, it’s only one part of the financial picture. There are numerous hidden costs that can add up and catch first-time homebuyers by surprise.
Knowing these additional expenses ahead of time can help you prepare well and avoid financial stress. Here are some of the hidden costs of buying a home and what to expect after closing.
1. Home inspection
Cost: $300-$500
A home inspection is not always a required part of the homebuying process, but having your entire future home thoroughly inspected by a professional can save you thousands of dollars in future repairs by identifying problems in the home before you close. If the inspector finds any significant issues, you can use them as a bargaining chip to bring down the price of the home, or ask the seller to fix them before you close.
2. Appraisal fees
Cost: $300-$600
Most lenders require an appraisal to confirm that the home is worth the purchase price. If the appraisal comes in lower than the agreed-upon purchase price, you may need to renegotiate the price or cover the difference out of pocket.
3. Closing costs
Cost: 2-5% of the home’s purchase price
Closing costs may be the most substantial hidden expense in the homebuying process. While some buyers are prepared to handle the down payment, they can be surprised by closing costs, which include various fees such as:
Loan origination fees. Lenders charge this fee to cover the administrative work that’s involved in processing your loan.
Title insurance and title search. Title insurance protects both you and the lender from potential ownership disputes. The title search is conducted to ensure there are no existing claims on the property.
Recording fees. Local governments charge these fees to make your ownership official in public records.
Escrow fees. An escrow company manages the transfer of funds and important documents between buyer and seller.
These costs are usually paid upfront at closing, so be sure to budget for them alongside your down payment.
4. Property taxes
Cost: varies
Property taxes are an ongoing expense that can vary significantly depending on where you live. While most people understand they’ll pay property taxes, it’s easy to overlook just how much these can cost annually. Many lenders require you to set up an escrow account where a portion of each mortgage payment goes toward your property taxes, as well as homeowners insurance.
Be sure to check the local property tax rate before purchasing and see if your target property is in a high-tax area. It’s also wise to check if there’s any potential for property tax reassessment after the sale, as taxes may increase once you purchase the home.
5. Private mortgage insurance (PMI)
Cost: 0.3-1.5% of the loan (annually)
If your down payment is less than 20% of the home’s purchase price, most lenders will require you to pay for private mortgage insurance (PMI). PMI protects the lender if you default on the loan, and it typically costs between 0.3% and 1.5% of the loan amount annually.
While PMI is an additional monthly expense, it can be removed once you reach 20% equity in the home through mortgage payments and appreciation. Still, it’s essential to factor in this cost if you’re putting down less than 20%.
6. Homeowners insurance
Cost: $800-$1500 (annually)
Homeowners insurance is a necessary expense that protects you in the event of natural disasters, theft or accidents. Many lenders require buyers to pay for the first year’s premium upfront at the time of closing. Average homeowners insurance costs can range from $800 to $1,500 annually, depending on the location, age and condition of the home.
If the property is in a high-risk area for natural disasters, such as a flood zone or an area that’s prone to earthquakes, additional coverage, like flood or earthquake insurance, may be required, adding to your annual insurance costs.
7. Professional cleaning
Cost: $120-$325
Most sellers will deep-clean their home before putting it on the market, but they may not be as detailed when they actually move out. Real estate contracts generally require the home to be “broom-clean” before the seller moves, but this only means a very basic cleanup, with floors swept and trash removed. You may choose to have your home professionally cleaned and sanitized before you move for a real, fresh start. Be sure to budget for this cost.
8. Immediate repairs
Cost: Varies
Unless you’re buying a new construction home, your new-to-you house will need some repairs. From a fresh coat of paint, to new window treatments and light fixtures, to replacing carpets and appliances, this can cost just a few hundred dollars to several thousand or more.
9. Moving
Cost: $500-$3000
The cost of the actual move is often overlooked, but can add up, especially for long-distance moves or if you need professional movers. Moving expenses include packing supplies, rental trucks or hiring a moving company, which can cost anywhere from a few hundred to several thousand dollars.
Don’t let the hidden costs of moving take you by surprise! Use our guide to be prepared for the true cost of moving.