It Sure Looks Good from Here
Many renters relish the idea of owning their own home. If they are like most people, they prepare a budget, look around the neighborhood at what's selling, accept some necessary compromises, and pursue a few properties that meet their general criteria. The process may go smoothly at first, and chances are good that they find an acceptable home that they can furnish with their dreams. It hasn't seemed as difficult as their friends said it would be. Then, just about the time that they hope to close the deal, there's a torrent of unexpected costs, eroding their fragile budget and fraying their nerves.

Get Out Your Checkbook
Unexpected closing and move-in costs can ruin the best of real estate deals before they reach fruition. Many first-time buyers are unaware of credit fees, legal charges, escrow, notary, and Realtors® fees among the many closing costs. They haven't considered the sudden glut of sales taxes, moving costs, furnishings, immediate improvements, and utility hook-up fees.

Often new buyers prepare a budget, leaving out annual mortgage costs and homeowner's insurance. The average cost for homeowner's insurance in 2004 was estimated at $608. As for mortgage rates, they vary by individual credit, the down payment, and whether the owner settles on a long-term, fixed rate, or an adjustable rate. Figure at least 10% of the total cost of the house as a monthly payment.

Novice buyers frequently fail to plan for the annual costs of maintaining their new home and its appliances. The need for new paint or electrical and plumbing repairs may seem unpredictable, but they are inevitable.

Closing Costs Can Be Killers
Although the hidden costs seem like lurking icebergs, new buyers can still follow through on their purchase if they budget for them. It's wise to lead with a calculator, not new owner emotions.

Often, first-time buyers believe that even with zero-down deals they won't have to spend money up front. But closing costs are typically 4% to 6% of the total price of the home. Real estate agents advise buyers to have at least $1,000-$5,000 on hand just to get in the door. Although closing costs can be negotiated and split with the seller, these costs typically go beyond what new buyers usually plan to spend.

It's important to have a frank discussion with the seller or Realtor® on closing costs. A sound budget must include possible expenditures for appraisal fees and inspections. It's wise for buyers to ask their Realtors® to include a purchase agreement clause stipulating that the home has to pass inspections for stability, code violations, appliance conditions, termites, and molds. If not, the buyer risks having to finance work to improve these conditions after they move in.

Negotiations determine who conducts the deed title search and pays for it. The title should be clear of any liens, judgments, defects, or encumbrances that a new owner may end up having to settle. Title insurance will cost from $500-$2,000, depending on the value of the home. Any prospective owner should be aware of the itemized costs of all taxes and closing fees, including mortgage application fees that are passed on to buyers.

New homebuyers should also budget wisely for mortgage insurance. The cost is added to the mortgage principal, ranging from 1.25% for 20% down to 3.75% for 5% down. Some people purchase mortgage life insurance, a term policy that pays off the mortgage if they die, instead of leaving the burden to their families. Lenders often charge more than insurance brokers in adding this to monthly mortgage payments.

Maintenance Means More Budgeting
Once move-in costs are settled, there's still more to pay. Annual property taxes shock many first-time homebuyers. Property taxes are levied as a percentage of the home's assessed value. Local taxes range by municipality, but they average from 1-5% annually. At 5%, a home assessed at $250,000 would have a yearly property tax bill of $1,250. If the previous owners paid a portion of the year’s taxes ahead of time, new owners may have to reimburse them as well as pre-pay taxes for the months ahead. They will also have to pay for annual repairs that they're used to turning over to landlords.

The overall condition of the home and appliances at the time of purchase, as well as the annual weather conditions, determine the extent of annual routine maintenance. New owners should plan on setting aside at least 5%-10% a year of the total home price for upkeep and repairs. Some years they may spend only a few thousand dollars. Then again, a new roof could cost a whopping $15,000.

Outdoor painting of the house, depending on square footage, could cost $800 for the paint alone. Carpets wear out; light fixtures break or pass from fashion; and windows shatter. A new furnace, air conditioning unit, or water heater, is certainly a major expenditure.

First-time homebuyers hope that their dream house will last, but people who have owned homes for years will testify that there are trials ahead. If new buyers are realistic, ask appropriate questions of sellers and Realtors®, and budget wisely, they can soften the blows of inevitable closing and maintenance costs.

About the Author
Gabby Hyman has written for print and online media for more than 20 years. He has created online content for eToys, GoTo.com, Siebel Systems, Avaya, and Nissan UK. He has also been a web consultant to the Governor of California. As an author of fiction, journalism, and poetry, Gabby is a former English professor for the University of Illinois, University of Alaska, and Old Dominion University. He holds an MFA in fiction writing from the University of Alabama.