4 Things to Understand Before You Close
by Heather James
Owning a home is synonymous with the American Dream. It’s a highly anticipated rite of passage to adulting for many and this stability and pride can also be a great investment. But let’s face it, buying a house can be extremely stressful.
Here are four potential additional costs that I often see homeowners overlook or, worse, fail to plan for in their budget – so let’s get real before you pop the bubbly.
Can You Afford It?
This should go without saying, but I’m going to address the elephant in the room. Before you make the homeownership leap, make sure you can afford it. Consider your income, your debts and your lifestyle. Don’t put all your disposable income into the home and plan a slush fund for the unexpected. Most financial experts say that your mortgage should not equal more than 28% of your gross monthly income. If you stay around that number, you have a far better chance of enjoying your new home and all the associated perks.
Everyone envisions their forever home, but even if your first house is not your dream home, don’t let that discourage you from buying. Experts say you should plan to live in a house for five to seven years to see a return on your investment. If you can find something you can live with for 10 years, you should be in an even better position to move forward. The one you buy now may not be your forever home, but better to take a first step today toward that dream home and build up some equity toward getting that forever home tomorrow.
Rising Property Taxes – and Homeowners Insurance
As they say, you can’t avoid death and taxes. For homeowners, that means property taxes -- and those costs can go up, something that catches many people by surprise.
Most lenders require you to set up an escrow account to ensure these hefty bills are budgeted for properly. Lenders frown heavily on tax liens that impinge on their interest. Even if you have a fixed rate mortgage, your escrow account will fluctuate and it’s usually not in your favor. Once a year you will receive an escrow account update, this will let you know whether your account is short due to taxes or insurance increases, whether it has remained the same or, best case, you will receive a check with the overage. The lenders are not allowed to keep money in this account, it must be returned to you. If the account was short, you will often see your “new” monthly payment included in the statement.
This is where I see many homeowners misstep. They assume because they have a fixed rate mortgage, that monthly payment will not rise. Well, the rate doesn’t, but the escrow account can – and often does.
The fixed rate is only your principle and interest payment. It does not take into account the escrow portion of your payment – which includes property taxes (and homeowners insurance which can also rise). The only thing that the lender can guarantee is that their interest rate will not change. If you have an issue with your property taxes, you’ll have to take that up with your local tax assessor’s office.
Homeowners insurance can rise for a variety of factors and those increased costs will be reflected in the escrow account. Reasons for an increase in insurance range from natural disasters, claims made on home events, a change in the insurer’s rate/policy, and others.
Property taxes and insurance are something that you should research thoroughly. Compare different neighborhoods in different counties to see what is reasonable in your area. Those tiny invisible borders can affect a lot of factors. And be prepared for your monthly payment to rise with a tax or insurance increase.
…And Watch Out for those Improvements
Many homeowners are not aware that when the county and city assess the value of a property, they factor in improvements. Improvements – on your property and even sometimes of your neighbor’s – can cause a tax rate increase.
Improvements can be as major as adding a bathroom, renovating a kitchen or adding on a room. Even relatively minor improvements, like adding a shed or a deck, can cause property taxes to rise. Again, property tax is a topic to broach with the assessor’s office, not with your mortgage lender.
Homeowners Association Dues
Another cost for unsuspecting homeowners can be the dues or fees associated with an HOA – a home owners association. Whether run by a volunteer board of neighbors or by a professional management company, homeowner association fees can be a significant surprise to new buyers.
Learn if a property falls under the purview of an HOA and research how it’s managed. Many have an annual, often split into bi-annual payment, for landscaping, street, and utility maintenance. Other properties have quite substantial monthly fees especially if the neighborhood maintains amenities like a pool, tennis courts or a clubhouse. Notch it up a level if your property is a condo, townhome or some other type of planned unit development.
And homeowners should be prepared for those HOA fees to rise which they can and do either as annual dues increase or for a special one-time assessment. While one-time assessments are typically for major renovations – like a pool or tennis court repair – they can also be in response to damage from natural disasters or, worse yet, from mismanaged finances by the HOA itself.
Wise buyers should thoroughly research the HOA prior to purchase, including the association’s historical fee structure, governing board and potential near-term planned large expenditures.
Maintenance, Maintenance, Maintenance
Personally, I think they should add a third thing you can’t avoid in this life – death, taxes and maintenance. Speaking as a homeowner myself, it seems like there’s always something that breaks or needs attention.
Congrats, you have a yard! Now, you need a lawn mower, edger, fertilizer and weed treatment (and a spreader to apply it), a weed eater, hedge trimmer, flowers, mulch and the list goes on. And if you don’t have the time, skill or desire to do it yourself, a yard service can be an unexpected – and sometimes hefty weekly or monthly expense.
All sorts of other maintenance costs add up quickly and run the gamut from regular costs for HVAC air filters and annual service, gutter cleaning and resealing granite counter tops to minor painting and plumbing needs.
Then there are what most people consider emergency expenditures…bigger ticket items like hot water heaters, garage doors, furnace and air conditioners, major appliance repair/replacement (stove, refrigerator, dishwasher), a new roof and interior/exterior paint. Add to those a second category that I call “immediate emergency” expenditures -- like when you discover mold in the house and it needs remediation, pronto. Or the deck is rotting and falling apart. Or a tree falls on the house and you need to not only replace the roof but repair water damage.
While all this talk of unexpected cost from property tax and HOA fee increases and maintenance issues paints a fairly dim picture of homeownership, I still highly recommend purchase over renting so long as you adhere to your budget and can stay in the home for at least five years. In the long run, owners win out as long as they don’t sink all their disposable cash into the purchase price and properly prepare for these four often overlooked costs that can occur after closing on a property.