For millions of people, buying a house is like a dream come true. They imagine themselves sitting in their backyard drinking cocktails with their friends while the kids play on the swing set and nothing could be better.
But for all too many people the house becomes like a noose around their neck. Usually this is because they bought more house than they can afford or they underestimated the total cost of ownership.
Here are five things home buyers often forget about:
The tax man always comes to get his share and you had better be prepared to pay him. When you are figuring out how much home you afford you need to add property tax into the equation. You can look up the current tax bill to get an idea of how much you’ll need, but keep in mind that property taxes usually only go in one direction, and it’s not down.
Homeowner’s insurance is another expense that generally only goes up so you’ll need to keep some wiggle room in your budget so you’re prepared for the inevitable rate hikes.
Private Mortgage Insurance
If your down payment is less than 20 percent of your home’s value you may be required to pay private mortgage insurance. The purpose of PMI is not to protect you, but instead to protect the lender in case you default on the loan. PMI can be costly so shop around. Some lenders have more creative mortgages for first time buyers who can’t afford a large down payment so it may pay to do a little research.
Man, I hate escrow accounts. We had one with our first house but I hated it so much I refused it when we bought our second home. Escrow accounts are used when the lender pays your property tax and insurance for you. It’s nice to not have to worry about those bills since they’re built into your monthly mortgage payment, but there is a trade-off.
To ensure they have enough money to cover expected expenses, your lender will require you to keep an extra amount in the account to serve as a cushion. Once a year or so they look at the payments and determine if an adjustment to your payment is necessary. Do you want to guess which direction they adjust it? In the seven years we owned our first home we received the dreaded Escrow Shortage Notice six times. In each case we found our payment being raised anywhere from $35 to $200 a month.
We moved into our home a few years ago and we were happy to be moving into a house that didn’t require a lot of work. The previous owners kept everything in good shape so it definitely wasn’t a fixer-upper.
Even so, we’ve been hit with a number of expenses that have put a dent in our wallet.
The kitchen faucet sprung a leak and needed to be replaced. Hurricane Sandy ripped a bunch of roof tiles off the house. The hot water heater rusted out and started leaking and that needed to be replaced.
These types of expenses aren’t really unexpected, they’re just examples of normal maintenance expenses that all homeowners face. There’s always something breaking down or needing replacement.
When you’re already stretching yourself thin just to pay the mortgage every month, finding out that your payment is increasing because of taxes, insurance, or an escrow shortage can be like getting kicked in the gut. If you’re a first time home buyer you want to make sure you keep these expenses in mind or you could end up over your head.