The Hidden Costs of Homeownership and Its Financial Impact

When buying a home, most new buyers tend to focus on the mortgage rates. However, there are several unexpected costs that can be significant and result in an unwelcome surprise if you do not budget accurately. In this blog post below, we will review both the primary types of additional hidden costs as well as discuss its financial impact on buying vs. renting decisions in the short-term.

What are the homeowners’ hidden costs?

The unexpected or hidden costs typically include both closing and recurring costs. Key recurring costs include property taxes, maintenance or HOA fees, homeowners’ insurance, potential repairs and utility bills.

First, we will review the unexpected costs of being a homeowner. We break down these costs into one-time costs at the time of closing and recurring costs for maintenance and upkeep.

Closing Costs

Depending on whether you have a mortgage, closing costs can vary significantly. If you require a mortgage, most of these costs support creating the loan. These costs can range from 3-6% of the loan amount and may include the following:

Application Fee: Lenders will charge a fee to process your loan request and this fee can be up to $500.
Appraisal Fee: Lenders will order a 3^rd party appraisal to assess the value of your property to inform the loan amount. These fees may range between $300 and $600, but it can be higher.
Loan Origination Fee: Loan origination fees cover the lender’s cost of processing and underwriting the loan. Expect to pay about 1% of your loan’s value.
Title Insurance: Lender’s title insurance repays the bank if you lose your home to a title claim. This is separate from owner’s title insurance and this might cost up to $875.
Private Mortgage Insurance (PMI): Your lender will require you to pay PMI if you put less than 20% down at closing on a conventional loan because it protects the lender if you default. Most homeowners pay $30-$70 each month for every $100K they borrow.
Property Taxes: Property taxes fund investments like public schools, roads and fire departments. Your lender might require you to pay up to a year’s worth of property taxes at closing.
Title Search Fees: Title searches look for claims on your property. Liens, bankruptcies or unpaid back taxes can mean that the seller does not technically own the home they are selling. The title insurance company or real estate attorneys perform the title search. Expect to pay $200 to $400 for your title search.
Transfer Taxes: Transfer taxes go to your local government for transferring the home’s title to you. Like most local taxes, this fee will vary depending on where you live.
Underwriting Fee: Your underwriting fee goes to your lender in exchange for verifying your loan paperwork. You might pay up to $795 in fees for your loan.
Lead-Based Paint Inspection: If you’re buying a home built before 1979, it might contain lead paint. Lead-based paint poses a significant health risk. This fee covers a test for lead and is around $300 for an inspection.
Pest Inspection Fee: In some states, you are required to get a pest inspection before you close on the loan. The average pest inspection costs about $100.
Flood Certification: If your home is in or near a flood zone, you may need to pay $15 to $25 for flood certification, which goes to the Federal Emergency Management Agency.
Real Estate Attorney Fees: Attorney fees can range from $500 to $3K per transaction. These fees typically cover negotiating the terms of the offer, drafting and reviewing contracts, conducting a title analysis, coordinating with your mortgage broker and other due diligence through closing.
Real Estate Broker Fees: Broker fees for the buyer are typically built into the selling price of the property and shared between both the seller’s and the buyer’s broker. These fees range between 5-6% of the home’s selling price.

Other fees (e.g., credit reporting fees, courier fees, inspection) may also be part of the overall closing costs depending on the specific property and financing details. The best approach is to check with your real estate broker and attorney to obtain an accurate estimate of the closing costs.

Recurring or Ongoing Costs

Next, we review the recurring or ongoing costs besides the mortgage payment that homeowners pay to maintain their property. Unfortunately, the homeowner does not have much control over these costs. These costs have significant budgeting implications, and may require homeowners to create a separate emergency fund for your home.

Property Taxes

According to a recent analysis by WalletHub on US Census Bureau data, the average American spends $2,690 on property taxes each year. In fact, the top 7 real estate tax states based on the effective real estate tax rate include: NJ, IL, CT, NH, VT, TX and NY.

The amount of property taxes is usually tied to the value of your home and therefore, the more expensive the home, the higher the property taxes. Based on the US Census Bureau’s median real estate taxes paid in 2021, Americans on average paid 10% more taxes than 2020!

Median annual real estate property taxes paid in the US

However, property taxes could vary greatly based on local real estate dynamics and the management of state & county budgets. In certain states, property taxes could increase significantly annually if certain markets experience an upswing in home valuations.

For example, in NYC, lower and middle-income homeowners that own co-ops and condos have experienced a 7.28% increase in property taxes over 2022! There are some homeowners that even experienced double-digit increases! This steep hike is largely due to two unique factors:

With the recent real estate boom in 2021, the city’s annual assessment of the market values increased significantly due to both price appreciation and an increase in new development properties.
A shortfall in the city’s budget resulted in an incremental increase to offset the tax revenue loss.

Separately, for new developments, the advertised real estate taxes could jump up by as much as 50% after the 1^st year. This may occur because the city may have only conducted a preliminary assessment based on its partial occupancy rate. The subsequent assessments after full occupancy and completion of all amenities could be much higher. Be weary of the sudden increases to your property tax after the first year of taking ownership!

Increases to your taxable value can also be attributed to growth in rent values of comparable buildings as certain state laws may require the department of finance to calculate the taxable value based off of comparable rental buildings.

Homeowners’ Insurance

Homeowners’ insurance is generally a good idea since this will be the largest purchase most people make in their lifetime. The insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Mortgage lenders will generally require homeowners insurance for protection.

According to Insurance.com, the average cost of homeowner’s insurance in 2023 is around $2,777 annually. However, it can fluctuate widely depending on the type of property, the location and value.

Maintenance Expenses

As a homeowner, there are several recurring expenses required to support maintaining your property. These expenses could range from minor to major costs depending on extent of upkeep needed. For older homes, this expense could be much greater as there could be greater risk to repair and replace major items. Below, please find the most common types of expenses:

Plumbing: Plumbing problems are one of the most common home repairs, with issues such as burst pipes or sewer backups costing thousands of dollars to fix. Annual maintenance can help prevent these problems and may cost between $100 to $300 per year.
Paint and Siding: Over time, the exterior of your home will require repainting or repairing damaged siding. These costs can range from $2,000 to $20,000 depending on the size and materials used
Appliance Replacements: Replacement and maintenance of furnaces, HVAC heating and cooling systems or broken water heaters are examples of types of appliance replacements. HVAC heating and cooling systems can cost between $100 to $1,000 per year
Landscaping Costs: Maintaining a healthy lawn and landscaping can add to the beauty of your home but it can quickly add up. Homeowners can expect to pay $500 to $2,000 per year. These landscaping costs may extend beyond your yard, and also include adjacent public space (e.g., sidewalks). My father recently got a mandate from NYC to fix the sidewalk and gutter because of the natural wear and tear from harsh winter conditions, claiming that it was his responsibility because the sidewalk was adjacent to his property. The cost to repair and replace the sidewalk was $10K because he owned a corner house!
Pest control: The need for regular pest control depends on whether you have a one-off issue or you live in an area that may be prone to ticks, termites and ants. According to Angie’s List, the national cost ranges from $200 to $600. You can pay $50 for lice removal to $8,000 for termite fumigation. The wide range in costs vary based on the type of pest, the severity of the infestation and difficulty of removal.

For annual maintenance costs, studies have shown that homeowners should budget 1% to 4% of their home’s value as cited by UrbanTurf and Angi. However, according to a recent survey of 2,000 homeowners, the average homeowner encountered ~4 unexpected costs within the first year and spent around $3,600. These costs are on top of the mortgage payment, maintenance costs and property taxes!

HOA Fees

If you live in a townhouse or apartment condominium, you are likely to have monthly HOA fees. These fees cover the cost of maintaining the common areas, such as lobbies, patios, landscaping, swimming pools, tennis courts, lounges and elevators. In some cases, the fees also cover some utilities, such as water/sewage fees and garbage disposal.

HOA fees vary significantly depending on the property and community. According to iPropertyManagement’s 2022 report, the average monthly HOA fee for a single-family home is $250.

If you live in a community or apartment complex with several units, the HOA fees may be lower because there are more units to spread the cost. Whereas, if you live in a building with fewer units, your monthly cost may be higher.

Additionally, wage increases to the building’s staff and any major projects to the building or community may result in increases to your HOA fees or common charges.

Major Exterior Repairs

Major exterior repairs may include repaving the driveway, fixing the deck or replacing the roofing. These large projects are typically required either due to weather damage or from the natural wear-and-tear over time.

According to Angie’s List, the average cost to repair a concrete driveway is $1,716. However, if you have a large driveway and there is extensive damage, the cost can be higher. Additionally, the cost of replacing a roof can range from $5K to $30K depending on the size of the roof and the materials needed.

Utilities

Finally, let’s not forget the monthly utilities bill which usually covers electricity, water and gas. The added difference for homeowners vs. renters is that for homeowners, your property might be much larger or it may be less energy efficient which could result in consuming more energy and therefore, result in a higher bill.

The average cost can vary based on where you live, the size of your home, and the utilization due to the number of people in your household. According to a recent analysis by Move.org on data from the US Energy Information Administration, the average monthly utility costs could range from $538 to $613! This cost would cover electricity, natural gas, water, sewer, trash, internet, phone and streaming services.

How does the hidden costs compare to renting?

Our analysis suggests that the annual recurring cost of homeownership vs. renting could be 1.6X to 1.8X higher depending on different mortgage rate scenarios of 4%, 5% and 6.7%. It also shows that the incremental recurring costs could be almost as much as the mortgage payment itself!

We conducted a relative cost analysis to understand how much more expensive is it to be a homeowner in 2023 comparing the annual recurring costs of owning a home vs. renting under different mortgage rate scenarios of 4%, 5% and 6.7% (today’s 30-year fixed mortgage rate).

In our example, we assumed the following:

Purchase price of home is: $467,700 (US median price of home)
20% down payment and a 30-Year fixed mortgage on a conventional loan
30-year fixed mortgage value of $374,160
Excluded closing costs and unexpected expenses (e.g., major repairs) as these are one-time expenses
Key recurring costs include: mortgage payments, maintenance expenses, property taxes and utilities costs
Annual maintenance to be 2.5% of the home value
The annual median real estate tax to be ~1.11% of the home value
The annual utilities cost is $3,489 (or $291 / month)
The average US median rent is $1,937 per month

Table: Analysis of Annual Recurring Homeowner Costs vs. Rent

Depending on the mortgage rate scenarios of 4, 5 or 6.7%, the recurring annual cost of homeownership excluding the mortgage payment could be almost equal to the mortgage payment ($20,327 vs. $16,077 to $21,729). Comparing the annual recurring costs of homeownership to renting including the mortgage payment, the relative costs suggest it is ~1.6X to ~1.8X more expensive to own vs. rent in the short-term. If inflation continues to persist at an elevated level above 2%, these recurring costs could be significant on your budget and may influence your decision to buy or delay homeownership.

Obviously, we recognize the benefits to owning your primary residence in the long run such as: building equity in an appreciating asset, flexibility to access your home equity for other investments, and having an asset that outperforms inflation in the long-run. Our intent above is to highlight how the hidden costs can have a significant impact on budgeting and your decision to buy vs. rent in the short-term.

We hope this brings transparency into the hidden costs of homeownership and you will carefully review your expenses beyond mortgage obligations so that you have a more accurate picture of how much you will need to budget every year.

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