When buying a home, it's hard enough wrapping your head around the mortgage and down payment—this could be the single-most expensive purchase of your lifetime. But if you’re not fully prepared, there are additional hidden costs that can catch you off guard.
“These hidden costs may include closing costs, moving expenses, utility setup, and deposits,” says real estate investor and broker Jacopo Iasiello.
Understanding these costs is crucial to avoid unexpected financial strain and to ensure a smooth home-buying experience. In this article, we’ll walk you through all the extra costs when buying a house. Preparing for these hidden costs of buying a home can help you use your budget more effectively, potentially even negotiating or reducing some of these expenses.
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Types of hidden costs when buying a home
Being aware of hidden costs can help you avoid surprises. These are some of the most common hidden expenses that come with buying a home:
1. Closing costs
Closing costs are the fees and expenses that come with finalizing a mortgage—and while they’re not exactly hidden, they can still come as a shock to many first-time homebuyers. “Many people focus on the down payment, but closing costs can add another 2% to 5% to your expenses,” says Rachel Stringer, a real estate agent at Raleigh Realty.
They typically range from 2% to 5% of the home's purchase price and can include a variety of charges. “On a $400,000 home, that could mean an extra $8,000 to $20,000,” Stringer says.
Some typical components of closing costs include:
- Loan origination fees: Charges from the lender for processing the loan
- Title insurance: Protects the buyer and lender from any title disputes or legal issues
- Government recording fees: Fees for recording the sale with the local government
- Prepaid costs: These can include property taxes and homeowners insurance that need to be paid upfront. “For example, if you prepay a year of property taxes on a $3,000 annual bill, that’s an additional $3,000 right there,” Stringer says.
To manage closing costs, Iasiello suggests getting a loan estimate early. “Lenders are required to provide a loan estimate within three days of your application, outlining the estimated closing costs,” he says. “Also, shop around for services; you can shop for a title company, home insurance, and home inspection services. And in some markets, you may be able to negotiate with the seller to cover part of the closing costs.”
2. Home inspection and appraisal fees
Home inspections and appraisals are important steps in the home-buying process, designed to protect you from unforeseen issues and ensure the property's value aligns with the asking price. “The inspection itself might cost around $300-$500, but it’s what comes up during the inspection that can lead to unexpected expenses,” Stringer says. “Roofing issues, plumbing problems, electrical deficiencies, HVAC concerns, or mold and pest infestations are common issues that can require costly repairs.”
While the inspection itself is a known cost, it's crucial to budget for potential repairs that could arise from the inspection report. Even if the seller agrees to cover some repairs, “you might still be responsible for others,” Stringer says. If the inspection does reveal issues, it’s wise to get quotes from contractors for any necessary repairs or renovations before re-negotiating with the seller.
An appraisal, on the other hand, is conducted by a licensed appraiser to determine the property's market value, ensuring the lender that the home is worth the loan amount. Appraisal fees can range from $300 to $600 depending on the property size, location, and complexity.
3. Property taxes
Property taxes are annual taxes that homeowners pay to local government entities, such as cities, counties, or school districts, based on the assessed value of their property. “Property taxes vary significantly depending on the location,” says Mike Wall, a real estate investor. “To estimate future property taxes, buyers should check the current tax rate for the area and multiply it by the home’s assessed value,” he says. “Keep in mind that taxes can increase if the home is reassessed at a higher value.”
Most states in the U.S. display local and state tax rates on their websites. To make managing property taxes easier, Wall suggests setting up an escrow account with your lender. This account will hold a portion of your monthly mortgage payment, which will be used to pay your property taxes when they come due. This way, you won't have to worry about making a large lump-sum payment each year.
4. Homeowners Insurance
If you have a mortgage, you’re required to have homeowner’s insurance. And even if you don’t, it’s a smart way to protect your investment. If your home suffers damage from a covered peril, or if someone gets injured on your property and you’re found legally liable, your insurance policy can help cover the costs. “Homeowners insurance typically covers damage from fire, wind, hail, theft, and vandalism, as well as liability for injuries that occur on the property,” Wall says.
Standard homeowners insurance policies often don’t cover flooding or earthquakes and may require additional policies. When comparing homeowners insurance policies, pay attention to the coverage limits, which are the maximum amounts the insurer will pay for a covered loss. Also consider the deductible, which is the amount you must pay out-of-pocket before your insurance kicks in.
Carefully review each policy’s exclusions, which are specific situations or types of damage that the insurance will not cover, and ask for bundle discounts. “It’s helpful to get quotes from at least three different providers and ask about any bundling discounts if combining with auto or other insurance policies,” Wall says.
While the cost of the premium is a significant factor, it shouldn’t be the only consideration. “Buyers should also compare premium costs and consider the insurer's reputation for handling claims,” Wall says. The cheapest policy might not provide the best value.
5. Homeowners Association (HOA) fees
When buying a home within a community that has a homeowners association (HOA), you’ll likely be required to pay HOA fees. These fees are recurring charges that cover the cost of maintaining shared spaces and amenities, as well as services that benefit the community.
HOA fees can vary significantly depending on the community’s location, the amenities it offers, and the overall size and upkeep of the common areas, being quite substantial in some high-end neighborhoods. Before committing to purchasing a home, evaluate the HOA fees: Look closely at what services and amenities are covered by the fees and whether these align with your lifestyle and needs.
In some cases, especially in a buyer’s market, you might be able to negotiate with the seller to cover a portion of the HOA fees for the first year. This can help ease your transition into a new home and allow you to better budget for future payments.
6. Ongoing home maintenance
After you close on your new house, the expenses don't stop with the mortgage and utilities. Homeownership is an unlimited hidden cost of buying a house and involves a variety of ongoing maintenance tasks that can add up over time. Some of the most common maintenance expenses include HVAC servicing, lawn care and landscaping, pest control, and roof and gutter maintenance.
Planning for these expenses by saving a bit more each year can help you manage these larger costs without disruption. “A good rule of thumb is to set aside 1% of your home’s value annually for maintenance and repairs—for a $300,000 home, that’s about $3,000 per year,” Stringer says. “And always have an emergency fund for unexpected repairs—it’s a lifesaver when the unexpected happens.”
7. Moving costs
Moving costs can be one of the most significant hidden costs of buying a house, ranging from a few hundred to several thousand dollars. They typically include hiring professional movers, renting moving trucks, purchasing packing supplies like boxes and tape, and potentially paying for temporary storage if there’s a gap between moving out of your old home and into the new one.
There are several ways to reduce moving costs. One option is to handle the move yourself by renting a truck and recruiting friends and family to help, which can be significantly cheaper than hiring professional movers. Additionally, getting multiple quotes from moving companies can help you find the most competitive rates.
Moving during the off-season (from September through April) or mid-week, when demand is lower, can also lead to lower costs. Finally, donating and selling things you don’t need or want anymore before the move can reduce the volume of items being transported and potentially lower costs further.
8. New furnishings and renovations
When buying a new home, many homeowners find that their existing furniture and decor don't quite fit the new space or style they want to create. This often leads to purchasing new furnishings, like couches and dining tables, which can quickly add up. Additionally, some homes might require renovations to better suit the buyer's preferences or to improve outdated areas, with minor cosmetic updates costing a few hundred dollars and major remodels potentially costing tens of thousands.
To manage the costs of new furnishings and renovations, prioritize your purchases and improvements. Start with essential furniture pieces and gradually add non-essential items over time to spread out the expenses.
When it comes to renovations, prioritize projects that will enhance your home's functionality or add value, such as updating old appliances or fixing structural issues. Setting a budget for both furnishings and renovations can help keep spending in check. Also, consider doing some of the work yourself if possible, or purchasing second-hand or discounted items to save money.
FAQs
What are hidden costs of buying a home?
Hidden costs are expenses associated with buying a home that aren't immediately obvious when you first consider purchasing a property. These costs go beyond the down payment and mortgage and can include fees like closing costs, home inspections, property taxes, homeowners insurance, and ongoing maintenance. Understanding these costs is crucial for budgeting accurately and avoiding financial surprises during the home-buying process.
Are hidden housing costs ranked as the biggest stress on mortgages?
While hidden housing costs are not always the single biggest stressor, they are a significant source of anxiety for many homebuyers. These costs can add up quickly and unexpectedly, making it challenging to manage finances effectively. Unexpected expenses like major repairs or rising property taxes can strain a homeowner's budget, especially if they are not adequately prepared.
How can I reduce the impact of hidden costs when buying a home?
To minimize the impact of hidden costs when buying a home, start by thoroughly researching and understanding all potential expenses. Ask your real estate agent for a detailed breakdown of anticipated costs, including closing fees, inspection fees, and any potential repairs, and consider setting aside an emergency fund to cover unexpected costs. Shopping around for services such as home insurance, moving companies, and utility providers can also help you find better rates and save money. Additionally, planning your purchases and renovations over time rather than all at once can help spread out costs and keep your budget under control.