If you’re thinking about buying a home, you’ve probably crunched the numbers time and time again. Undoubtedly, you know a thing or two about the components of a mortgage payment, including the principal and interest you will pay. While it’s prudent to know about your monthly mortgage bill, there are other expenditures associated with homeownership that you’ll pay before and even during the life of your loan.
When you enter into a contract to buy a home, the deal will likely include a contingency that must be cleared before moving forward. Mortgage lenders will typically require an appraisal before signing off on the loan. Because the property is the asset that will act as collateral, a bank wants to make sure the home is worth the asking price. Typically costing several hundred dollars, the appraisal will be paid during the closing process. Bear in mind, there will be additional cost if the appraisal and selling price do not line up.
Another common contingency item is the inspection. This investment, which is likely to be around $500, cannot be more important. It’s designed to protect the home buyer from unexpected structural concerns or other issues that could lead to a money pit. But luckily, the inspector will put the home under a microscope. Some of the findings will be minor, such as wear and tear along the home’s baseboards, or a detailed description on an aging water heater. The report can also reveal larger issues that you may use in negotiations. If, for example, the roof will need to be replaced soon, you may be able to ask the seller to credit you for the anticipated cost. But mostly, the inspection is a necessary expenditure that will come out of your pocket at the time of closing.
As you know, everything is taxed. You may also be on the hook for previous property taxes that were already paid for by the current owner upon closing. The costs will be broken down, but anticipate a larger upfront tax payment when you buy your home. The costs directly associated with the home loan also include homeowner’s insurance, and possibly mortgage insurance. Homeowner’s insurance is like auto insurance in that it’s not optional. But it may not cover some natural disasters. So depending on where you decide to call home, you may consider purchasing additional insurance for worst-case scenarios.
If you plan on moving into a newer development with fresh infrastructure and newer schools, you will be paying Mello-Roos taxes (if in California). Named after state lawmakers who authored the act, the tax supplements impact fees paid directly by developers to pay for public parks, roads and schools. Remember, this is not a property tax, which is levied based on assessed property value, but rather, it's an independent tax you may be on the hook for.
Some communities will also tack on home owners’ association (HOA) fees, typically paid monthly. HOAs are not unique to condominium communities and could apply to any neighborhood. These funds typically go toward maintenance of common areas and other shared recreational amenities.
Knowing every cost you are getting into when you purchase a home will create a much smoother process.