Buying your first home is incredibly exciting. You have a space to call your own, can begin building equity, and even enjoy some tax advantages. With these new benefits, you also have new responsibilities as a homeowner. If you recently became a new homeowner—or if you’re putting together your budget to become a homeowner—it’s the perfect time to dig deeper into the responsibilities that come with homeownership. The better you understand these responsibilities, the smoother your transition to homeownership will be.
Financial responsibilities.
Purchasing a home is one of the biggest financial decisions a person ever makes. Homeownership often provides people with financial stability and allows them to reach a higher net worth than renting. Homeowners in the US have an average net worth that is almost 40 times higher than that of renters, a huge wealth discrepancy.
To reap the financial benefits of home ownership, you have to uphold your financial responsibilities. These responsibilities include making your mortgage payment, keeping up with home maintenance, and paying your property taxes.
Your mortgage payment.
The first thing that comes to mind when you’re house hunting is probably, “What will my mortgage payment be?” Before you close on the home, make sure the loan payment will fit in your budget. If you’re late with your mortgage payment, your lender will often charge you a late fee.
Late fees.
These late fees generally range from 3% to 6% of your mortgage payment for the month, which can add up quickly. A late payment on a $2,000 monthly mortgage, for example, would cost you between $60 and $120 each time. A missed payment may also hurt your credit score.
Missed mortgage payments can also have more extreme repercussions. If you miss three or more mortgage payments, your lender will likely begin the foreclosure process. So it’s important that you can not only afford your payments but also pay on time.
The advantage of automatic payments.
Consider setting up automatic mortgage payments to avoid the consequences of late payments. You’ll protect your credit score, save on late fees, and enjoy reduced stress when you “set it and forget it.” As long as you’re depositing sufficient funds in your source account before the payment date, you won’t have to worry about scheduling a payment.
Home maintenance, renovations, and appraisals.
Beyond the cost of purchasing your home, you must plan for home maintenance and renovations. Unexpected emergencies and natural disasters will eventually affect most homes, as will age and time. While insurance will play a role here in certain circumstances, you as the homeowner are responsible for any necessary repairs and maintenance.
Preparing for maintenance and renovations.
Don’t skip a home inspection before buying. In a competitive market, it can be tempting to offer to waive inspection contingencies. But a thorough inspection will warn you of potential problems that might arise in the near future. In some cases, you might be able to negotiate with the seller to take care of urgent issues before you close.
Set aside a rainy day fund. A general rule of thumb is to set aside 1-4% of your home’s value every year to prepare for home repairs and maintenance. If your home is more than 10 years old, or if you live in a particularly rainy or humid environment, you are more likely to need repairs soon, so you may want to bump up the amount you save. The more you can save ahead of time, the less likely you’ll need to use credit when something breaks.
Invest in a Home Warranty policy. Regular maintenance can help prevent small problems from becoming larger, more expensive repairs. If you purchase a Home Warranty policy, you can save money on the costs of individual appointments for covered services.
You also have to consider the tax appraisal of your home, particularly if you are planning renovations. Any improvements you make to your home can increase the tax appraised value, leading to a higher tax burden—but they can also increase your equity in the home, giving you additional financial options.
Insurance and taxes.
Homeowner’s insurance offers financial protection if your home (or personal property within) is damaged in an event like a fire or hurricane. Most mortgage lenders will require you to have some homeowner’s insurance, so be sure to factor that into your budget.
You will also owe property taxes on your home. The amount you pay in property taxes depends on where you live, anywhere from less than 0.75% to over 1.5% of your home’s appraised value. Your property taxes are generally included in your mortgage payment, but be sure to check.
If you take out a mortgage with a down payment of less than 20%, your lender may require you to buy private mortgage insurance (PMI). PMI protects the lender in the event you stop making your loan payments. On average, you should expect to pay 0.22% to 2.25% of your total mortgage amount in annual PMI fees. The good news here is that you can generally count on the PMI requirement to be removed once you pay down the principal balance of the loan below 80% of the home’s value.
Avoid surprises with an escrow account.
Homeowner’s insurance costs and property tax bills can sneak up on you. Ask your lender about setting up an escrow account.
- The expected costs for property taxes and your homeowner’s insurance policy renewals will be divided up into monthly installments and added to your regular mortgage payments.
- This extra amount you pay each month will be deposited into an escrow account from which your lender will pay the property taxes and insurance bills when they come due.
- In some cases, your escrow account might even earn interest.
With an escrow account, you’ll avoid the surprise of a single large bill and have peace of mind from knowing these important expenses will be taken care of.
Dues, monthly expenses, and fees.
Other costs associated with owning a home include mover fees, closing costs during the home-buying process, utility fees, trash removal fees, and, potentially, homeowner’s association (HOA) fees. Thinking through each of these upcoming costs will help you build your budget before making an offer on a home.
Take your time checking out movers and get multiple quotes. Reviews on sites such as Yelp can be useful, but also ask your friends and acquaintances about personal experiences.
Calculate the closing costs. Common mortgage closing costs range between 2-5% of the total loan amount and include:
- Loan origination fees
- Appraisal fees
- Title search fees
- Title insurance
- Real estate agent fees
- Local recording fees and taxes
- Credit report charges
- Inspection fees
- Notary fees
Compare utility bills. In many cases, if you’re working with a realtor, they will be able to obtain copies of recent utility bills from the seller (ideally for a full year) to give you a sense of what you might expect to pay in your new home. Some utility companies may also be able to provide data on average bills within that zip code.
Understand any HOA expenses and benefits. If you’re joining an HOA as part of your purchase, be sure to carefully review their fee schedule and regulations, both to plan for the recurring membership fee and to avoid paying unnecessary penalties. You’ll also want to understand what sort of major expenses might be shared by everyone in the HOA, such as roof repairs.
Any time you make a late payment—for your mortgage, homeowner’s insurance, or other home expenses—expect to pay a late fee. As with your mortgage, setting up automatic payments for any recurring expenses will help you avoid that stress and expense. Source
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