Real Estate 

Often Ignored Costs of being a first time Home Buyer

Purchasing a first home is a big part of the American Dream. Some things just can't be priced with a number. The Freedoms we have as Americans or having space to breathe. We can't put a price tag on some things. 

No matter what your personal values are, many have the perfectly reasonable goal to purchase a home. No matter what future plans we commit to, to not be disappointed later in life it's important to understand what we are getting into.

Buying a first home is often the biggest purchase people will make. And because of the large dollar amount, and even to a greater degree because the purchase is financed, it's important to reduce the risk of financial ruin or disappointment.

Home as an Investment?

Being honest with yourself and having a basic level of financial literacy is key. You will hear your neighbor or brother-in-law tell you the home is an investment. 

By breaking down the day-to-day costs, and opportunity cost of a down payment, we come to realize that at best a home is usually only a forced savings account. Like the tax refund you receive at the end of the year for overpaying your taxes.

You are forced to build equity in your home by paying down the principal balance with each monthly payment. When the loan is finally paid off, if market conditions remain good, the principal in the home should remain.

Now that we understand we are not really investing when purchasing a home. What should we understand about the operating expenses in home ownership?.

Often Forgotten Costs

Don't forget about big expenses. Renting looks expensive but are you really throwing money away? No, because you paid for shelter. Did you throw money away when you bought groceries? No, you paid for food.

What are these expenses? Let's break it down. Interest Expense. Taxes. Transaction Costs. Capital Improvements and Maintenance/Repairs. And Heating/Cooling costs.

A 1% increase in your interest rate has a large impact on the total interest you pay for the life of the loan. Also, don't forget that the interest is front loaded on a standard loan! This means that the majority of your payment is actually just a straight expense for the first 5 years!

Depending on how much you borrow, taxes can cost as much as the principal and interest itself! Just look at high tax states like New York, with property taxes 2-3% of assessed values! On a $400,000 house at a 2.5% property rate that is $10,000 in taxes a year! 

And you don't usually ever stop paying these! In fact, they usually go up from year to year. Don't forget that what you will pay and what the previous owner paid might not be the same. The home can get reassessed after a sale and the costs can double or triple!

How about the other expenses? When the HVAC breaks, and it will, you as the homeowner are responsible for fixing it. Licensed contractors are like doctors. They charge a pretty penny! Two to three of these repairs a year can easily set you back a couple thousand.

None of this should be taken to discourage you from home ownership, there are many benefits to being your own landlord. And like I mentioned, you can't put a price tag on everything.

What are other costs of being a homeowner? Well, new kitchens, or a new bathroom remodel can cost a small fortune. Contractors are in the business of making a profit, and this will be reflected in your bill.

Remember that a home can easily be three times as big as your average 1 bedroom apartment. In the winter, the additional square footage will be a significant expense.

The most important thing is just to be aware of these costs before committing yourself to a large purchase.

But what can be done to reduce your costs?

Start small and make decisions based on your personal financial situation. Don't borrow to purchase the nicest house on the block. Don't become house rich and cash poor, this is not a way to live.

Buying a cheaper home will reduce your monthly payment, interest, and property tax.

Don't buy a house if you plan on moving frequently. The costs for real estate agents, moving costs, and fixing up your home to sell it will deplete your equity and may put you underwater on your loan.

Spend wisely on improvements and maintenance. Figure out what a fair price for a remodel is or to pay someone to fix something when it breaks. Look at the material price in the big box stores to get a better understanding.

Is there really 30k worth of cabinets and work in this new kitchen? I spent about 2k on my last kitchen remodel. And I replaced almost everything! This was with me doing a few things and hiring out the more difficult tasks.

The lesson here is to be smart with your money and don't freely give your hard-earned money away to the salesman or businessman!