What Buying a House Really Costs

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

Buying a house or condo is a big step, and it's smart to consider all the costs involved to be confident you’re making a wise decision. But before you sign on the dotted line and close on the house, you’ll want to understand the extra expenses.

After all, the list price isn’t the final amount you’ll pay. Your mortgage rate, insurance, inspection fees and many other factors can all increase the costs involved when owning a home.

Below, you’ll learn about the most common home-related expenses that could catch you off guard when you’re about to buy a home. You’ll end up with a more realistic understanding of how expensive it is to buy a house.

Factors that can affect the cost of buying a home

Your mortgage rate

Your lender’s interest rate is among the most important factors influencing the true house cost. Getting a lower interest rate can make a big difference in the house you can buy. After all, even a 1 percent difference in rates can translate into you paying hundreds or thousands of dollars more each month just in interest costs.

For example, if you make a 20 percent down payment on a house with a $400,000 list price, you’re putting $80,000 down. You need a $320,000 mortgage. If you finance that over 30 years at 6 percent, your monthly payment would be about $1,920. Going up just one percentage point to 7 percent would increase your monthly payment to $2,130. That’s $210 more per month, or $2,520 more per year. (These figures don’t include escrow and taxes.)

To find lower rates, shop around, as rates can vary a lot based on the lender and terms of the loan. Beyond this, taking steps to increase your credit score and decrease your debt-to-income ratio can also help you qualify for lower rates.

Mortgage points

Mortgage points are an optional fee that you can choose to pay your mortgage lender in exchange for a lower interest rate. Each point will typically cost you 1 percent of your total loan amount. While terms vary from lender to lender, a point will usually translate into a 0.25 percent reduction in your interest rate.

While you’re not required to pay mortgage points, they can be an effective way of lowering your overall interest costs. But they also increase your closing costs, so you’ll need to factor that cost into your budget.

Private mortgage insurance

Many lenders require you to carry private mortgage insurance (PMI) if you don’t put down at least 20 percent of your home’s purchase price.

PMI lowers the risk to the lender if you were to default on your mortgage—but it increases your monthly mortgage costs. In most cases, PMI will be calculated as a percentage of your loan amount—usually between 0.5 and 1 percent. This can add hundreds of dollars a year or more to your mortgage payment.

Property taxes

Property taxes can vary widely depending on where you live and your home value. These include taxes charged by your city, county and state plus your area school district and local utility district. 

In most cases, property taxes are collected annually. But often when you pay your mortgage, your lender may include an additional monthly payment that’s deposited into an escrow account. This money is intended to pay your annual taxes. Whether you save through escrow or not, it’s a good idea to set an amount aside for taxes each month for the large yearly bill.

Home inspection

Having a home inspected before you make an offer is a smart way to avoid costly problems down the road. Although it may be tempting to save money and win a bid by waiving the inspection, it could leave you unaware of a safety issue. And many lenders require an inspection as a condition of the loan.

A home inspector will look at the home from top to bottom, providing a detailed condition report. Depending on the house size and cost of living, an inspection can range from around $300 to $500, according to the Department of Housing and Urban Development.

The inspector will often look at the following:

• Plumbing issues such as leaks, condition of pipes or other equipment
• Electric concerns like wiring and breakers
• Heating and cooling ducts, vents and insulation
• Structural conditions of the foundation, walls and roof
• Exterior conditions of surfaces (paint, siding, stone, wood, etc.), windows and doors
• Evidence of pests
• Landscaping appearance and drainage

You’ll get a thorough report detailing what the inspector found. In less competitive markets, you may be able to negotiate with the seller to fix some issues.

Based on the home’s location, a radon test or mold test may also be required. Radon testing runs for between $145 and $700, and mold testing can be from $300 to $1,000.

Homeowners insurance

If a bank is lending you the money to buy the home, you’ll typically be required to insure it. And even if you’re not borrowing, having homeowners insurance is still highly recommended. It can protect your investment from a variety of threats.

Many variables can impact the cost of homeowners insurance, including your credit score, house location and its size and condition. Carriers in your region will be able to provide an accurate estimate. Living in a floodplain or an area with high risk for earthquakes, hurricanes, wildfires or tornados can spike your costs. And it can also require you to carry additional kinds of coverage known as riders or supplemental policies. Any riders or supplemental coverage you purchase will also increase your bill.

Other types of closing costs

When closing on your home, it can feel like you’re getting hit with fees on top of fees. Being prepared for these added costs can ensure you’re ready for these payments when they come vs. having to dip into your emergency fund. Some of the costs include these:

• Appraisal fees
• Application fees
• Attorney fees
• Closing fees
• Loan origination fees
• Title search fees
• Tax monitoring fees

Hidden costs of home ownership

As most new homeowners quickly learn, new costs often creep in even after closing. Appliances and furniture can add thousands of dollars in expenses. Even furniture, rugs and lamps can be surprisingly expensive. Renovations and landscaping can also add tens of thousands to your bottom line—as well as unexpected costs, like a garage door that breaks down or a furnace that gives up.

It’s a good idea to budget for planned upgrades and unplanned ones. You might plan to spend approximately $1 per square foot of your home (or about 1 percent of your home’s value) each year on maintenance. So, a home of 2,000 square feet valued at $400,000 could cost $2,000 to $4,000 per year in maintenance. Costs might soar in some years—for example, when you replace siding or repair concrete.

Aside from upgrades, there may be recurring fees that you’re not used to paying. After all, you don’t want to be caught off guard by lots of unexpected bills. So you might need to have money ready to pay for:

• Homeowners association fees or condo fees
• Trash and recycling collection fees
• Utility costs (electricity, water and gas plus Wi-Fi)
• Lawn mowing and landscaping (along with snow removal in colder climates)
• Security system/camera installation
• Swimming pool maintenance

Get ready to buy with confidence

As you begin to budget for and eventually purchase a home, it’s important to include the other costs that might hit your bank account. Knowing that you’ve considered all the costs can give you confidence that you’re ready to make such a large purchase without becoming “house poor.”

Your Northwestern Mutual financial advisor can be a big help with this major step in your life by helping you get prepared. They can also look at your broader financial picture and point out opportunities and blind spots to grow and protect your money as you continue to work toward other big financial goals down the road.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.