Four Things First Time Home Buyers Don’t Always Consider

For millions of people, buying a house is like a dream come true.  They imagine themselves sitting in their backyard drinking cocktails with their friends while the kids play on the swing set and nothing could be better.

But for all too many people the house becomes like a noose around their neck.  Usually this is because they bought more house than they can afford or they underestimated the costs involved.

Here are a few things first time home buyers often forget about:

Property Taxes.   The tax man always comes to get his share and you had better be prepared to pay him.  When you are figuring out how much home you afford you need to add property tax into the equation.  You can look up the current tax bill to get an idea of how much you’ll need, but keep in mind that property taxes usually only go in one direction, and it’s not down.

Home Insurance.  Property insurance is another expense that generally only goes up so you’ll need to keep some wiggle room in your budget so you’re prepared for the inevitable rate hikes.

Private Mortgage Insurance.  If your down payment is less than 20% of the home’s value you may be required to pay private mortgage insurance.  The purpose of PMI is not to protect you, but instead to protect the lender in case you default on the loan.  PMI can be costly so shop around.  Some lenders have more creative mortgages for first time buyers who can’t afford a large down payment so it may pay to do a little research.

Escrow.  Man, I hate escrow accounts.  We had one with our first house but I hated it so much I refused it when we bought our second home.   Escrow accounts are used when the lender pays your property tax and insurance for you.  It’s nice to not have to worry about those bills since they’re built into your monthly mortgage payment, but there is a trade-off.

To ensure they have enough money to cover expected expenses, your lender will require you to keep an extra amount in the account to serve as a cushion.  Once a year or so they look at the payments and determine if an adjustment to your payment is necessary.  Do you want to guess which direction they adjust it?  In the seven years we owned our first home we received the dreaded Escrow Shortage Notice six times.  In each case we found our payment being raised anywhere from $35 to $200 a month.

When you’re already stretching yourself thin just to pay the mortgage every month, finding out that your payment is increasing because of taxes, insurance, or an escrow shortage can be like getting kicked in the gut.  If you’re a first time home buyer you want to make sure you keep these expenses in mind or you could end up over your head.

1 Comment so far

  1. Money Beagle on November 21st, 2012

    I think a fifth one that is equally as important is upkeep. That roof you have might look good today, but it’s going to need replacing. Same with your windows, your furnace, and other stuff that you never really worry about too much when you don’t own the place where you live. Those things are all expensive. I’ve seen it said that you should set aside 1-2% of the homes value per year to adequately pay for those types of things. If you have a $250,000 house, that’s $2,500 – $5,000 that should be budgeted, which is a big number that many people don’t think of.
    Money Beagle´s last blog post ..How Much Crazy Black Friday Shopping Do You Do?

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