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7 Ways A Home Keeps You Broke

It’s hard to imagine that owning your own home can be a financial inconvenience. After all, a home is where you have your peace of mind, build your family, and make further plans for your life. However, owning a home doesn’t come without cost even if you inherited it. There are so many costs attached to it, and you may be ignorant of how much it’s taking out of your pocket on a monthly or yearly basis. So what are these costs? Keep reading and I will share with you seven costs of a home that can keep you broke!

Number 1: Upfront Costs

As we know, the buying process of a home can be long and tedious. What many people don’t know is that the cost of the home itself goes beyond the price tag.

If you’re a first time homeowner, then it is important to calculate the total amount it will cost you to finalize the entire process. The first cost are appraisal fees. You will want to know how much the house is worth prior to bidding and if you want an appraisal, it will cost you as much as $500.

The second expenditure is earnest money otherwise known as your deposit and this ranges between 1% and 3% of the selling price of the home. It is paid upon acceptance of the seller and will ultimately go towards the down payment on the home. Finally, there are the inspection fees. You want to ensure the house is in good working order before you buy it right? Well an inspection will cost you between $300 and $500.

Number 2: Closing Costs

This is the amount of money you will pay at the closing of the transaction. When a real estate deal is closed, it means that the title of the property has been transferred from the seller to the buyer. Unfortunately, closing costs only add to the upfront costs you have already paid in your house buying adventure. So what closing fees can you expect?

Closing fees are dependent on a variety of factors. These include the area where the home is located, the nature of the property, and the loan you take.

Common closing costs include the application fee which is the fee that is charged by the lender to process your application. Before you submit your application, be sure to ask the lender exactly what would be covered by this fee. It may include your credit check or appraisal. Luckily, not all lenders charge an application fee and if they do it can often be negotiated.

Then there are attorney fees. This fee is charged by an attorney, whose job it is to review the closing documents on behalf of the buyer or lender. Bundled into your legal fees will generally be fees for the homes title insurance and courier fees as the relevant documents must be finalized in a timely fashion.

So how much are closing costs typically?

Usually, buyers will spend between 2% to 5% of the selling price of the home on closing fees.

If the home costs $150,000, then you will pay between $3,000 and $7,000 as closing fees. The lender will provide you with a loan estimate, and this will include the amount of closing costs. This happens within 3 business days of receiving your loan application. Again, the figures I just mentioned are estimates and could be different in your unique situation.

Number 3: Mortgage Payments and Insurance

A mortgage payment is a scheduled payment you make on your home. This payment includes both the principal and the interest, and it is paid to the lender of your home loan. For those who are unfamiliar with these terms, when it comes to your routine payments, the principal is the amount of money you pay that goes directly towards paying down the balance of the loan whereas the interest is the fee you pay for having borrowed money.

Now, adding to the concept of the mortgage principal, again this is the entire amount of the loan you received. For instance, if you take a $250,000 mortgage, then that figure is the principal amount. So, if the $250,000 mortgage represents 80% of the home’s appraised value, then the homebuyer would be required to make a down payment of $62,500. This will amount to $312,500, being the entire our price.

Unfortunately, you the bank doesn’t lend you the money for free so part of each mortgage payment you make will be interest. The interest on a mortgage is the monthly percentage added to each principal mortgage payment. Sadly, your payments in the earlier years could see 2/3 of your money goes strictly towards interest with a measly 1/3 going towards the actual balance of your mortgage. Luckily however as you continue to pay down this debt, you will flip this ratio and will see the majority of your money go towards the principal instead.

On top of your mortgage payments is insurance. This insurance can come in two different forms. The first is private mortgage insurance which is insurance you pay if you put down less than 20% on the purchase price of your home. This insurance gives the bank assurance that you will not default on your payments. Second is home insurance and this is to protect the assets you own and the home itself. As you are probably starting to notice, homeownership isn’t a cheap endeavor!

Number 4: Maintenance and Repairs

Taking account of the cost of regular maintenance and repairs is very important when you own a home. Rounding up this figure is tricky, but there are certain strategies that can help you out. The general rule of thumb is to be prepared to spend between 1% to 4% of the home’s total value annually on maintenance.

If your home costs $200,000, then expect to spend around $2,000 to $8,000 annually on maintenance. Account for factors like the age of the home, its location, and its current state when you do your estimates. A newly built home will require less maintenance, as all its facilities will still have long-lasting value. Maintenance of a home of this nature will cost you less than a home that’s 20 or 30 years old.

Also, homes located in areas with harsh weather conditions will cost you more to maintain.

Another way to estimate these costs is to use the square footage system. A larger property will cost more to maintain than a smaller property. You can estimate annual maintenance costs to be $1 per square foot of your home. This means that for a 1,000 square foot property, you’ll be spending $1,000 a year on maintenance.

This money will be spent on general maintenance such as landscaping, servicing appliances and replacing rusty faucets and fixtures. Sadly, these are just a few of the maintenance costs and they do not include repairs such as replacing a roof damaged by a storm, replacing a water heater or fixing a sinking foundation.

These sorts of repairs will of course cost you more than your normal maintenance costs. For this reason, be advised to buy a home only when you have enough money saved in your account.

Number 5: Renovations

Buying a new home is one thing, but setting it up to your tastes and standards is a whole different challenge. Renovations cost a lot of money, so you might want to consider these costs before you take a mortgage. To transform an old house back to its former beauty doesn’t come cheap.

I assume you want to live in your new home for many years, so this will mean spending enough time and money to make the home comfortable for you and your family.

Common renovation costs include the costs of any appliances and raw materials that are needed for the job and of course the labor fees you will pay if you contract out these jobs. However, there are numerous hidden fees attached to renovating your home. The first is building inspection fees. You may need to get your property assessed prior to a major renovation to ensure the integrity of the home.

Next are insurance fees. If you increase the value of your home then you can expect to pay more when your insurance is renewed. Finally there are warranty costs. Now that you have spent thousands of dollars on revitalizing your home, you will want to ensure that all the new pieces stay in tip top shape and one way to do this is to buy a warranty. These costs will bloat your initial renovation estimates but are fees you need to be aware of before renovating or even better before diving into home ownership!

Number 6: Property Tax

Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. In this case, we are talking about your home. Property tax is considered to be a regressive tax, which is based on the value of the building itself and the land.

As a homeowner, you should understand the calculations regarding how property taxes are assessed by the property appraiser in your city or state of residence. By doing this, you can ensure you will not be overcharged in taxes. The assessment of the tax on your property and land varies according to the type of property you own.

For instance, a vacant piece of land will have a much lower assessed value than a piece of land that has been developed (assuming the size of land is equal). This will mean lower property taxes.

If your property has access to public services like sewers, water or gas, then the land assessment will be higher. In a case where the land has the potential of being developed, then the owner may have to pay more on taxes. The amount of money that a property incurs as tax is gotten from a percentage of the assessed value of the property.

Number 7: Opportunity Cost

Just in case you’re not familiar with what opportunity cost of capital is, then allow me to explain.

Opportunity cost of capital refers to the gains a person, investor or a business forgoes for another alternative. This simply means sacrificing one potentially profitable investment for the other.

A lot of people are guilty of making their investment choices without considering the potential opportunity costs. The big question here is, what else could you spend this money on?

In the case of buying a home to “live in”, the opportunity forgone could be buying a larger home that can be converted to have its own rental suite or buying a smaller property so that you can use the extra money you have left over to invest in the stock market.

It’s true you still have to pay all the fees associated with buying a home in the examples I just gave but renting it out as a whole or in part would also mean that you are earning a fixed and regular income from the property.

In short, owning your own home is a major milestone in anyone's life as it is your personal space where you can plan and build your family. However, buying a home and not considering all the costs can leave you with buyers remorse which is why I felt it was important to share these costs with you so that you have all the information you need to make the best homebuying decision possible!

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