For hopeful first-time buyers who have only ever rented, it can be easy to misjudge what they can realistically afford as they start looking at home listings. To avoid starting your first few months of homeownership in financial stress, it’s important to understand the true cost of homeownership and set a realistic budget before you begin touring homes or making offers.
Beyond the mortgage itself, there are other expenses that add to the cost of owning a home. Property taxes, homeowners insurance, private mortgage insurance (PMI) and maintenance and repair costs can add hundreds, or even thousands, of dollars to your monthly housing expenses.
First-time buyers who don’t account for these costs risk stretching their budget by overbuying from the start. Here’s what to know about the hidden costs of homeownership and why financial experts say you should never buy at the top of your budget.
These homeownership costs can change
With a fixed-rate mortgage, your interest rate is locked in, and your principal and interest costs won’t change. But that doesn’t mean your monthly mortgage payment will stay the same. Other costs tied to homeownership can change over time.
Your property tax bill could increase if your home is reassessed or if local property tax rates rise. Homeowners insurance premiums can increase at renewal, and rate hikes are unfortunately becoming the norm. A LendingTree study found that between 2020 and 2025, homeowners insurance rates rose nearly 47 percent nationally.
It’s good practice to assume that your property taxes and insurance premiums will go up, because they usually do, said Stephanie Bucko, a CPA and chief investment officer and co-founder at Mana Financial Life Design.
Many lenders collect a portion of your annual property tax bill and homeowners insurance premium with each monthly mortgage payment and place those funds in an escrow account. But these amounts aren’t fixed.
“Your lender reviews your escrow account each year and can raise your monthly payment if taxes or premiums increase, so leave some room in your budget beyond what your first statement shows,” said Bucko.
To better budget for future property tax increases, Bucko suggests first-time buyers learn more about how property taxes and reassessments are handled locally. “It’s also worth learning how your area handles property taxes, since some states cap how much they can rise each year and others reassess closer to market value,” she said.
The costs many first-time home buyers forget about
When you make a down payment of less than 20 percent, your lender will typically require you to buy private mortgage insurance, or PMI. This insurance protects the lender if you default on the loan. The monthly premium is added to your mortgage payment, increasing your total monthly housing cost.
PMI costs vary depending on your loan amount and down payment, but according to Freddie Mac, you can expect to pay $30 to $70 per month for every $100,000 borrowed. On a $300,000 home loan, that’s about $90 to $210 per month. You can request cancellation once your home equity reaches 20 percent. It terminates automatically once you reach 22 percent.
Home maintenance is another expense many first-time buyers aren’t used to thinking about. Unlike renting, there’s no landlord to call when something breaks. You want to make sure you can afford general upkeep and any necessary repairs.
Regularly setting aside money is a good way to prepare for ongoing maintenance. “Plan on 1% to 2% of the home’s price each year, and lean toward the higher end if the home is older or has things like a pool or a big yard,” said Bucko.
On a $350,000 home, that’s $3,500 to $7,000 a year, or about $290 to $580 a month.
Bucko gave two suggestions to help buyers better understand what maintenance and repair costs to expect. “Before you buy, hire a great inspector and talk with the previous owner about what they’ve historically spent on maintenance,” she said.
Here’s how to set a realistic homebuying budget
If you have a mortgage preapproval letter in hand with a maximum loan amount listed, you may be tempted to use that number as your budget as you begin touring properties. But that’s risky.
“Your maximum approval is the lender’s limit, not your budget,” said Martin Mulyadi, PhD, an accounting professor at Shenandoah University. “I’d suggest building the budget from your own monthly numbers, with every ownership cost included and savings still intact, and then seeing what price that supports,” he said.
Here’s an example: If your take-home pay is $6,700 a month, your bills and debt payments total $2,700, and you set aside $1,000 for savings and investments, that would leave $3,000 for housing costs.
For a home priced around $350,000, your budget would need to cover more than just principal and interest. It should also include property taxes, homeowners insurance, PMI (if applicable), and $290 to $580 a month for maintenance based on the 1% to 2% rule mentioned earlier. If the total comes in under $3,000, the home may fit your budget. But if it’s higher, you may need to look at properties in a lower price range.
Bucko said she often sees clients looking at homes that are on the edge of their budget. With prices climbing and rates much higher than they were a few years ago, the approval number can feel like permission to stretch. “At the end of the day, remember, the lender makes money on a bigger loan. It’s not necessarily what you can comfortably afford,” said Bucko.
She recommends keeping essential expenses, including housing costs, to about 60 percent of your take-home pay. “That leaves room to keep saving, handle surprises and still enjoy your life,” she said.
To make sure your budget works before you commit, Bucko recommends a practice run: start saving the difference between your current rent and your estimated housing costs each month. “It shows you pretty quickly whether the number works for your life,” she said. “And if it does, you’ve also built up extra savings for the down payment or the first big repair.”
Buying a home is one of the biggest financial decisions most people will make. Understanding the full cost of homeownership before you buy your first home can help you avoid financial stress down the road.
The post Hidden homeownership costs can catch first-time buyers off guard appeared first on Washington Post.
