FIRST TIME HOMEBUYER?

Unexpected Costs That May Get You Into Trouble Financially

Buying your first home is an exciting personal milestone. You've qualified for the mortgage and you know what your monthly expense will be. Or do you?

Whenever we do something for the first time, we do not know what to anticipate. The same is true if you are buying your first home. All too often many new homeowners are unaware of the costs of homeownership. Not knowing what those costs are can get you into financial trouble.

What are those costs and how do you prepare for them? Let's start with the expenses that will need to be paid for at closing.

1.       COSTS IN ADDITION TO DOWN PAYMENT

First, you’ll want to have an attorney review your contract and for that service you should allow at least $350 or more. This fee is usually paid at closing and increases the amount of cash you need to bring to the closing. Buying property without an attorney review is a decision that can haunt you for as long as you own the property.

Just like the attorney contract review, a home inspection should be performed. This inspection will uncover problems that will become your problems as soon as you are handed the keys. For this service expect to pay around $400-$500.

If you are obtaining a mortgage, you’ll be required to have an appraisal that will run in the range of $500. All of the afore mentioned  expenses may be higher depending upon the complexity of your transaction.

At closing, you may be responsible for paying all or some of the title company and closing company fees. The title company insures that a clean title is passed to the new owner by performing a search for encumbrances on the property such as mechanic liens and are responsible if a title passes with unidentified liens.

One recent situation involved Pasquinelli Builders when they filed for bankruptcy. Unpaid mechanic liens on one of their developments had been recorded but the title company did not identify those liens. When the mechanics sued the homeowners for payment, the title company was responsible and the homeowners were exonerated.

The business where the closing is conducted prepares all the documents, issues payments and files the necessary documents. The fees for these services usually run $1000-$2000.

2.       INCREASED LIVING COSTS

Whether or not you had renter's insurance before, you will definitely want homeowner's insurance which will cost about $1000 per year or more depending upon the coverage you have.

You can also expect your utility bills to be higher, especially heating costs if poorly insulated or electric cost for air conditioning.

One client bought a condo in an older building with electric heat and windows facing west. His electric costs were about $300 per month in both winter (electric heat is not as efficient) and summer (more energy was needed to counter the effects of the hot afternoon sun).

As a renter you may not have had to pay for water, sewer, or garbage. Those are all new expenses you should expect.

3.       FIX THINGS

You no longer have a landlord that will come in and fix things - when something breaks down is now your responsibilities. Expenses that you can expect include plumbing leaks, painting the interior, repairs, hot water heater, gutter cleaning. These are all costs that you will need to pick up.

For example, you will want to clean your gutters at least twice each year. While most people anticipate fall clean up, they don't expect late spring gutter cleaning. Seeds from trees and bushes can quickly build up in the gutters causing them to clog. When they clog, the weight of rainwater can literally pull off the gutter, resulting in a repair more costly than cleaning. Each cleaning will run about $100, and more if you have a 2 or 3 story.

Or maybe the garbage disposal is inoperative, there is a plumbing leak or the hot water heater will need to be replaced within the first few months you are in your home. The home inspection you had done will give you a good idea of what to expect and when so you can anticipate and plan for the costs.

 

4.       MAINTAIN THE PROPERTY

Just as your car requires regular maintenance (oil changes, new brakes, tire and belt replacements), everything inside and outside of your property will require regular maintenance. If you have bushes or trees that die or become diseased, you will need to remove them.

 

Certain things will eventually need to be replaced due to aging, such the roof or the furnace.  Those expenses generally run in the thousands of dollars. Don't forget appliances that break down, driveway and sidewalk repairs, or gutters that need to be replaced.

If you know the age of the component, you can usually anticipate when the repair or replacement will be needed. This is. again, where a home inspection comes in handy as it identifies the issues so you can anticipate the cost and when it will occur.

Age of the component is no guarantee, however.  One client had her refrigerator's compressor break down when the frig was only 3 years old and the dishwasher had to be replaced 2 years later, each costing more than $1000.

5.       BUY NEW FURNITURE, WINDOW COVERINGS, DECORATE, ETC.

It is not usual to believe that your new home is perfect and will not need any work. Amazingly, once you have moved into your new home, suddenly your old furniture looks ratty. Or perhaps the window treatments do not really suit you.

If you now have a yard, deck or patio, you’ll probably want to buy lawn furniture, or maybe a grill. All those items run a few hundred and up.

New living room or bedroom furniture can easily run in the thousands. If you do buy new furniture, BEWARE, however, of store incentives that offer no interest for 12 months. If the full balance is not paid within that time frame, interest could be very steep (as much as 20% or more) and is calculated from the date of purchase.  On a $2000 purchase, for instance, the interest could add another $400 in cost.

How will you pay for those expenses? Savings? Credit? Or "I don't know."

TIPS TO REMAIN FINANCIALLY HEALTHY IN YOUR NEW HOME

1.       DON’T TAKE ON MORE THAN YOU CAN AFFORD. Anticipate the costs and start a savings program if you haven’t already. Even $10 per week adds up to over $500 per year.

2.       Establish an emergency fund that is at least 3-6 months worth of expenses. An emergency fund can help defray the cost of those unexpected expenses or should you have a loss of income.

3.       Avoid using credit, if possible. Debt is a financial cancer that can quickly spiral out of control. If you do use credit develop a plan to pay off the amount owed. For instance, if you buy furniture for $2000 with no interest for one year, you will need to pay at least $167 to pay off the balance during that time frame.

4.       Do not deplete your savings. If you do so, you'll have to rely entirely on credit and there is no guarantee that you will qualify for the credit. Even if you do qualify for the credit, how will the additional payment affect your overall finances?

5.       Budget! Many people cringe when they hear that word or tune out everything else you say next. To be financially healthy, though, you cannot spend more than you earn. Without a budget, you are flying blind as to whether you are running a deficit or have a surplus.

To best enjoy your new home, stay financially healthy. Do not hesitate to ask for professional help if you have difficulty developing a budget or have other financial issues and concerns.

 

For more information on Anne, visit www.anneschwab.net