Hidden costs of home buying go way beyond a down payment and mortgage

Buying your first home is unlike any purchase you’ve ever made. While it can be daunting just thinking about making a down payment on a house, the asking price won’t nearly reflect the amount you’ll end up paying, with extraneous costs popping up left, right and center. And if that incites enough anxiety to stick to renting forever, you’re not alone.

“Unless you’re a house-flipper or in the real estate industry, buying a home is probably an unusual activity for you. And as with any new and complex endeavor, you’re likely to make a lot of beginner mistakes,” said Amanda Clayman, financial wellness advocate at Prudential Financial. “Simply put, you don’t know what you don’t know.”

According to a NerdWallet report, 82 percent of millennials prioritize homeownership — more than any other generation. What’s more is that the study found most millennials plan to buy more than one home throughout their lifetime, either to relocate or rent out as an extra source of income.

Consider these three costs when budgeting for your first home so that you can live comfortably — both physically and financially.

1. Agent fees

It is likely that both you and the seller are each working with an agent. Together they will command an average of 5.08 percent of the final cost of the home, according to Real Trends data. For reference, the median cost of a home sold in the U.S. is $230,100, according to Zillow, which means agents might get a $11,689.08 cut of the sale price. And while that is a significant chunk of change out of your pocket, you might see a return on investment. Part of their job is to help you negotiate for a better deal on the home, netting you more money in the long run.

But it’s a double-edged sword. Clayman warned that “during the buying process, we often rely on the ‘help’ of people who have a vested interest in getting us to say yes to a home that may be right at the edge of our budget.”

2. Inspection costs

It’s no secret that real estate listings are often peppered with all sorts of adjectives to distract us from the truth: “Cozy” might actually mean tiny, and “charming” might mean dilapidated. It’s thus crucial to get an inspection of the home to determine whether the asking price reflects its true value.

To find a home inspector, have your real estate agent to refer you to a company they trust, or search the American Society of Home Inspectors’ database for a highly ranked firm in your zip code. Here’s where the inspection cost might pay for itself: If the evaluation determines the asking price far above the true value of the home, you can use that to negotiate a lower counteroffer.

According to Shaun Greer senior real estate director at Vacasa, costs vary depending on the age, condition, size and type of home. For example, a three-bedroom, two-bathroom 1,500-square-foot property in a suburban setting built after 2000 will cost around or less than $400 for the inspection. A larger, older home in poorer condition might command upwards of $1,400 for the inspection.

“This is important because buyers often don’t have a trained eye to know what to look for, said Beatrice de Jong, consumer trends expert at Opendoor. “If there are aspects of the home that need repairs, you can use the inspector’s report to your advantage in negotiating for the necessary fixes or possibly even a reduction to the purchase price.”

3. Mortgage insurance and interest

After handing over your down payment you’ll assume a monthly mortgage to cover the full cost of the home. Though it’s a fixed cost, it prompts a financial domino effect that can rapidly eat away at your budget.

Like a credit card, the cost of monthly interest depends on the terms of the mortgage, according to de Jong. What’s more is that the lender will perform an appraisal to determine the value of said mortgage, which can cost around $600 upfront.

If you’re unable to put down at least 20 percent of the cost of the home upfront, you’ll also be required to take out private mortgage insurance in order to protect the lender in the event you fall behind on monthly payments. According to Investopedia, the premium depends on factors like the length of your mortgage, the amount you’ve put down and your credit score. Typically, premiums range from 0.17 to 2.81 percent. So, if your mortgage costs $300,000, with an annual premium of 0.7 percent, you’ll end up paying $2,100 per year or $175 per month.

If you’re feeling a little worried about how to handle these extra costs, what you can do is “practice” paying the new monthly fee six months before your mortgage starts to ensure you can reasonably take it on, Clayman recommended. That doesn’t mean spending irresponsibly in order to match the new number. A good way to prepare is to invest the difference, set it aside as a financial cushion for home maintenance fees, or put it into a savings account so it’s out of sight, out of mind.