True Cost of Buying Home – Other Hidden Expenses

Last year I first put serious thoughts on buying home. We have been to this country since last 7 years and have been renting ever since. I studied our Buy vs Rent situation and decided to hold off buying home, till we save more money or, perhaps till we save enough money to buy without mortgage. But, apart from home value, taxes and closing costs, there are other hidden costs associated with a home. In this article we will talk about these associated costs that you should also consider while buying your new home.

Buying home

One of my colleagues is looking for a home and we had a discussion on the expenses he should pay, how much should he budget for? As far as timing goes, would it be worth it for him to wait and save a few more grands to cover the not-so-talked-about costs?

This list of these “Other” expenses could go on and on. They come from everywhere.

Turning on the power, water, municipal charges that they never mention on the listing, When you switch from renter to a homeowner, there are countless tools and accessories you never consider buying. Garden hoses, light bulbs, lawn mower & other garden tools, basic plumbing stuff. snow removal tools, cables and cords, It’s seriously impossible to think of everything.

This NY Time article talks about a few of such costs but, these are not all!

There’s a concept called “Property taxes”, which are due every year or maybe twice a year if you split it in half, that you never bother about while you are renting. Then you have your moving costs, school taxes (In some places property and school taxes are separate), cost of furnishing the rooms, landscaping, maintenance of the land and obviously, increased utility bills.

Other expenses when buying new home

To make it more presentable, here is a concise list of items that you’d pay for along with those listed fees on your agreement. Remember, these costs vary based on size and location of your home. Time of buy also influence some of these expenses.

1. Inspection cost
2. Moving Cost
3. Repair, maintenance and cleaning cost
4. Property (and school) tax
5. Increased electricity/gas (unless you are downsizing) bill.
6. Interior decoration and furnishing.
7. Landscaping, plants, pots etc.
8. Lawn care/garden care equipment
9. Replacing damaged parts, such us bulbs, fence, showers head, etc.
10. Painting, plastering and plumbing
11. Trimming trees
12. Depending on your area, snow removal, sewage/gutter cleaning, pool cleaning and watering
13. Cost of moving your services, like Cable TV, Land line phone, etc.
14. Home owners association fees

Some of the fees and expenses you might not have to incur but, most do. No matter how good condition your new home may be in, you have to fix and repair this and that. You have to decorate with new furniture, and, you may need to paint a few walls. Lawn has to be taken care of and landscape may need few hours of your time too. Also, you need to start building up emergency fund by putting away money from each paycheck.

A bigger emergency fund is needed because, as an owner you need to replace heavy duty electronics like heater, central AC when they outlive their life. As a renter you don’t have to think about these expenses. Experts recommend $20 – $50 more per paycheck in to emergency fund once you are a home owner. As a home owner you may need umbrella insurance to protect you from every type of harm that can be caused to your new home (Related – 25 Ways To Reduce Your Insurance Premium). Or, a Landlord Insurance, if you are a real estate investor.

In reality up to 1 – 3% of buying price goes in to these “Other” items. When you include closing cost, brokerages, taxes, etc. it ads up to 5% of your buying price. And, one important point to remember here, most of these expenses are recurring in nature, that means every year you’ll spend some money which, as a renter you never pay.

So, when you say you’re ready to buy your new home, do not just look for 20% or 30% down payment amount in your saving account, consider these costs too, if you’re not saved up yet to pay for these items, hold-on and save for a few more months before signing your papers. Exact money you need to pay for these hidden items vary. Talk to other buyers in the neighborhood, financial experts, and realtors to derive your figure.

A case study – our finance

When I used NY Times Buy vs. Rent calculator and plotted the figures. It shows me that I should buy home only if I am planning to stay here in South Florida for 15+ years. Which I doubt I’d be. Vindicating my decision to stay renting. If I stay here for another 10 years, then also buying doesn’t make financial sense!

Buy vs.Rent comparison

Do not forget the selling cost as well. We often overlook this cost. When we buy home we simply deduct buying cost from selling cost to derive the gains. When selling you have to pay taxes on the gains, if any. You’ll also pay the brokerage.

I have lived in places like Austin, TX and Phoenix, AZ, where property price is much cheaper. The calculator did show that buying home there would be wiser idea. Interestingly, NYT experts consider ‘Opportunity Lost’ cost in their calculator. Basically, “Opportunity lost cost” is the amount you could have earned if you had invested the down payment instead of buying your home. The hidden cost of buying your home also adds up ‘Opportunity Lost’ cost.

When I added up the hidden costs, applicable to my area, to a good-faith estimate. It stood at staggering $8,000 for the first year and $3,600 every year. YMMV.

This article shows that in my situation renting is a better option. But, as I said before, owning has non-monetary advantages associated with it. Social respect is one such aspect which can’t be compared with monetary loss/gain.

You may disagree but, I have seen home ownership raises social acceptance. A lot of our friends and colleagues are home owners and they never complain about increased monetary outflow. Even though I know how hard they struggle.

I think if you’re home owner, it indicates you have certain level of job security and have accumulated a sizable savings to pay the down payment. Owning a home perhaps improves self-esteem. At-least they have a place to call their own.

Owning a home can also fulfill some dreams, like growing up a garden or re decorating your rooms, etc. As a renter you need permission to have minor adjustment to the structure.

In our case, we have enough money saved to buy a sizable condo with cash in this area or, a decent sized single family home in other cheaper parts of the country, without taking a mortgage. Still I am renting as mathematics indicates I should continue renting, especially since our rent has been steady at $1200 per month since last 3 years.

Time of purchase : Do you want to be looking at houses in the middle of summer or the middle of winter? I live in Florida, so inspectors and repairmen give discounts in the winter but can barely handle all the work in the summer.

If you’re reading this article you may have been already in the market looking for your new home. One advice I am tempted to give here, start looking at houses whenever you can. You never know what you’ll find. Also, I discounted above average growth of home prices, they type we saw happening 2005 – 2008.

If that rise happens again in near future then these “other” expenses might seem tiny compared to the gain potential.

But, You know what happened next, after 2008.

If you are a home owner, what was your hidden costs of buying home? Did you incur a cost which is not mentioned in this article?

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  1. Mike @ Personal Finance Beat says

    Timely post as I am also considering buying a home in 2014/2015. Just last night I was trying to run the numbers to see if it makes sense.

    A big added expense for us — and one I don’t see mentioned — is possible commuting costs. We currently live in work in the city. Are commuting costs to work are about a combined $100 per month. I’m able to walk to work, while my fiancé takes the bus (10 minute ride). We do not own — or need to own — a car.

    If we were to buy a home we could afford, it would have to be about an hour outside of Manhattan. I checked the prices in one of the towns we are looking in: the cost for two monthly round trip train tickets to get to/from work is $680 per month! Then we’d have to get at least one car, say it’s a lease + gas/insurance and we are looking at an easy ) $1000 in added commuting costs.

    For the mortgage/taxes we’d be paying, we can find a suitable apartment in Manhattan for the same monthly price. I think as long as we are both working in the city, it makes sense to keep renting and instead invest that $1,000 in the market that we would be spending on transportation.

  2. says

    Good stuff! Buying a house is one of the most crucial decision a person can make. There are lots of factors to consider and I agree with Mike, the cost of transportation should also be looked into because renting a house might be impractical but if it means living near your place of work without the need to spend lots of money on gas or fare, then renting makes more sense.

  3. says

    I also planning to buy a house of my own in the near future because it is my ultimate dream though I know that achieving that goal means I have to wait years to save enough money. It would be a good investment for my money since having a place that I can call my own or my cocoon is the greatest achievement that I can give to myself.

    • says

      yeah that’s what I meant, having place which you own is a good feeling in itself. This was just a guide to help you thinking about your home purchase, decision is yours..whether to purchase now or later.

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