Purchasing your first home is a major life — and financial — milestone. After weeks or months of going through the search process and tempering your expectations to market realities, you get to sign on the dotted line and, at long last, join the ranks of homeowners.
But before you do, it’s important to keep in mind all of the changes that come along with homeownership. Owning a home involves a lot more than sending your monthly payment to a different address. There are a few more considerations to make before taking the plunge.
1. Down Payment
What used to be a small security deposit — typically a half-month’s rent — is now going to be a down payment, which can add up to tens of thousands of dollars. Depending on the terms of your loan, you’ll need to have between 10% and 20% of the home’s value in your savings account, ready for you to give away. That large lump of cash remains one of biggest obstacles for hopeful homebuyers, but there are programs in place to help first-time buyers secure mortgages with down payments as low as 3.5%, such as through the Federal Housing Administration, Wells Fargo, or Bank of America. Making a low down payment, however, isn’t always in your best interest. If you put down a lower amount to begin with, your loan amount will be larger, which means your monthly payments will also be higher. Also, these types of loans often come with required private mortgage insurance, with further inflates your monthly bill.
2. Closing Costs
In addition to the down payment, which applies to the value of the home itself, there are also the rest of the closing costs. It can vary, but closing costs usually include a loan origination fee, credit report, loan underwriter, home inspection and appraisal, title search, survey fee, and taxes (on the sale, not property taxes). These typically add up to somewhere between 2% and 5% of the home’s value, or an average of $2,100 for a $200,000 home. It’s not a huge amount, it’s definitely still an expense to be prepared for.
Earlier, we mentioned the possibility of private mortgage insurance, which protects your lender in the event that you’re unable to repay the loan. But to protect your own investment, you’ll want to get homeowners insurance to protect your house, your belongings, and your mortgage. (Many lenders will require this, too.)
The average U.S. household pays just over $2,000 in annual property taxes, which are either billed annual or semi-annually. When that bill arrives, you’ll want to be prepared. Ready your bank account by setting aside money each month to go toward the bill. Many mortgage lenders require that money is put in escrow monthly for the tax, but even if it isn’t required, it’s an excellent way to manage that big annual bill.
5. Maintenance Costs
Even brand-new houses aren’t immune to maintenance costs, and older homes can be quite a handful. You can expect to spend at least 1% of your home’s value on maintenance projects every year, which range from cleaning your HVAC filters to re-sealing the deck. If the money you set aside for one year goes unused, then you’ll have a little extra cash set aside in case you need to complete a larger project, such as a kitchen renovation or replacing the roof. Create a monthly checklist of tasks maintenance tasks to make sure nothing important gets overlooked.
Familiarize yourself with your city’s regulations, too. For example, when do they pick up raked leaves in the fall? And how? Do you need to clear sidewalks after a snowfall? How soon? Many cities also have dates for Christmas tree disposal and large item pickups, which can be handy to know if you need to replace any appliances.
This article was provided by Sam Radbil, a contributing member of the marketing and communications team at ABODO. ABODO Chicago apartments was founded in 2013 and is headquartered in Madison, Wisconsin.