Speaker 1: Welcome back to the Net Worth Podcast.
This week we are diving into the hidden costs of home ownership and how to avoid the expense of surprises that undermine your long term wealth strategy.
Check out the full edition on our website, wearenoyack.com.
That’s wearenoyack.com.
So the list price you see online, that’s never the real price.
It’s really just the headline, the bait.
I think our mission in this deep dive is to look past that number and make sure that you, whether you’re buying for the first time or not, are using this purchase as a real step toward building wealth, not not some budget explosion that just wipes you out.
Speaker 2: That’s absolutely right.
I mean, when we look at how real estate actually builds a network, it all comes down to cash flow.
The enemy here isn’t a bad market, not really.
It’s the the self-inflicted damage from costs you didn’t see coming.
If you train your savings just to get the keys, you’ve turned a long term asset into a short term liability.
The second that water heater goes, you’re in trouble.
Speaker 1: OK, so let’s unpack that.
Everyone knows they need to save for the down payment.
That’s step one.
But what blindsides people?
Is this next step the cash to close?
Why is that number always so much bigger than people think?
Speaker 2: It’s the fragmentation and just the sheer number of fragmented fees.
Think of it like 1000 tiny paper cuts that you know, altogether causes serious problem.
Our analysis in this edition of Your Wealth Blueprint.
Shows it’s typically an extra 2 to 5% of the purchase price, 2 to 5% and that’s in cash at the closing table.
It is totally separate from your down payment.
Speaker 1: That’s a huge amount on a $500,000 home, that’s another 10 to $25,000.
You just have to have sitting there.
That’s the difference between having a comfortable reserve and basically starting on fumes.
Speaker 2: Nicely.
And these costs, they fall into 3 buckets you can’t skip.
Speaker 1: Yeah.
Speaker 2: First are the lender fees.
That’s the bank charging you to originate the loan, underwrite it, all that paperwork, the privilege of getting the money.
Speaker 1: Exactly.
Speaker 2: Second, you’ve got the third party service fees.
These are for things like the appraisal, the title insurance, the escrow or attorney who handles the closing.
And then third, government charges, think transfer taxes, local recording fees, all of that.
Speaker 1: That list is already pretty dense and you don’t really see the full picture until a few days before closing.
But you mentioned something else and it’s often the biggest chunk of all.
The prepaid items, what are those?
Speaker 2: Right, so prepaids aren’t really fees, they’re advanced payments.
The lender makes you siege your escrow account so they know the money is there for the big annual bills.
Speaker 1: OK, so you’re typically required to pay 6 to 12 months of homeowners insurance and property taxes up front if your annual tax bill is, say, $6000.
You might have to bring 3 to $6000 just for taxes due the moment you sign.
That’s a huge chunk of cash flow right there.
If you haven’t budgeted for it, you’re in a bad spot.
Speaker 2: Yeah, absolutely.
Speaker 1: So OK, you survive closing, you get the keys.
Now the survival expenses hit.
And we’re not talking upgrades, we’re talking day one necessities, immediate security and privacy.
Speaker 2: You.
Absolutely.
Have to rekey the locks, you just don’t know who has a copy.
And you need window coverings, even if they’re just cheap air blinds to start, right?
Then you’ve got utility deposits, cleaning, and maybe some of those minor repairs the inspection found you really need a dedicated say 3 to $5000 move in.
Budget so you’re not dipping into your emergency fund for this stuff.
Speaker 1: And this is where deep cash reserves become so critical Let’s talk about the low appraisal risk we highlighted in this edition.
This is where you can be fully funded.
Everything looks good and then a surprise.
Speaker 2: Yeah, the bank is always risk averse so if you agreed to pay 520,000 for a house, but the appraiser.
Says it’s only worth 500,000.
The lender will only finance the 500,000.
They’ll only finance the lower value.
They will not loan you money for that $20,000 gap.
So that 20 grand is suddenly the buyers problem.
It’s your problem and you have three choices.
One, bring the whole 20,000 in cash to try to renegotiate with the seller, or three.
Walk away.
Speaker 1: Assuming you have an appraisal contingency in your contract, it’s the ultimate stress test for your cash.
That makes the appraisal contingency a critical financial guardrail.
Then let’s shift to the monthly payment.
When you get pre approved, they give you a number, but that number is it’s more of a floor than a ceiling, isn’t it?
Let’s break down PITI.
Speaker 2: The ITI is the full monthly cost key and I are principal and interest that parts stable but the T and the taxes and insurance, those are the variables and that’s where the shot comes from.
That’s where the shot comes from.
We call it the year 2 squeeze and the most I guess insidious part of that is the tax reassessment trap.
You have your budget set for year one and then suddenly it jumps.
How does that?
Speaker 1: Then property taxes are often based on the old, lower assessed value from the previous owner.
Once the home sells for a higher price, the local government updates its records.
But that process can lag by 612, even 18 months.
So suddenly your tax bill shoots up, your escrow is short, and your monthly payment has to go up to cover it.
So if you bought.
Home for 4:50 that was previously assessed at 350.
You’re almost guaranteed a big jump in the tea part of TI TI.
It’s a huge vulnerability if your budget is already tight.
Smart buyers have to model the property tax based on their purchase price, not the old number.
Speaker 2: And it’s not just taxes.
Homeowners insurance seems to be getting more volatile.
Speaker 1: Absolutely with climate.
As hurricanes, wildfires, carriers are pulling back or raising rates dramatically, it’s not uncommon to see your premium jump 15 or 20% in a year in some areas.
The Iron II is unpredictable.
Speaker 2: And then you have HOA dues.
If you’re in a community, those almost always go up.
And of course, PMI, private mortgage insurance if you put down less than 20%.
And those are just the predictable monthly costs.
Speaker 1: The addition points out that the true cost of owning isn’t monthly at all.
It’s lumpy.
Speaker 2: Yes, that lumpiness is what drain savings accounts.
The roof doesn’t fail in 12 equal installments.
The HV AC system doesn’t give you a monthly bill before it dies.
These are big, sudden, non-negotiable expenses.
Speaker 1: So to protect your net worth, what’s the baseline?
What should you be putting away?
Speaker 2: The smart baseline from this edition is to set aside 1 to 2% of the homes value every year for a $500,000 home.
That’s 5 to $10,000 a year into a dedicated maintenance fund and more for an older home.
Much more if it’s older or has complex systems like.
Well or septic that fund is your defense against the big breaks.
Speaker 1: OK so to prevent that year 2 shock, what are the preventative steps?
You mentioned running taxes on the new price.
What else?
Speaker 2: Get real insurance quotes during your contingency.
Don’t just estimate and if there’s an HOA you have to read the last year meeting minutes.
See what they’re talking about.
Are they discussing a big repair?
A fee hike.
Speaker 1: That due diligence extends to financing too, right?
Speaker 2: Yeah, because the advertised rate isn’t the real cost.
Ohh at all.
Speaker 1: So let’s talk about that.
We have to compare the APR, not just the interest rate.
What’s the key difference?
Speaker 2: The interest rate is just the cost of borrowing the money.
The APR, the annual percentage rate, is the true cost.
It includes the interest rate.
Plus most of the lender fees, origination points and so on.
Speaker 1: O the rate is the sticker price, but the APR is the out the door price.
A perfect analogy.
A low rate with high fees might actually cost you more, especially in upfront cash.
So what should buyers be stress testing before they sign on for 30 years?
Speaker 2: Number one, if you’re even.
Considering an adjustable rate mortgage and ARM, you have to stress test it at its maximum possible reset rate, not the low teaser rate.
If you can’t afford the worst case payment, don’t take the loan number 2 buying points to lower your rate.
Only do it if you know you’re kept alone past the break even point.
Otherwise you’re just throwing cash away.
And finally, get at least 2, preferably 3.
Lender quotes make them compete.
Speaker 1: And to protect your net worth, this edition recommends some really strict personal guardrails.
The first one is the 28% rule.
Keep your total housing cost PII plus HOA at or below 28% of your gross income, and the second one is your total debt.
Housing Plus, car loans, student loans, everything that needs to stay below 36 to 40%.
These rules give you breathing room.
Speaker 2: Let’s talk about the physical defense, the inspection.
This edition calls it the cheapest tuition you’ll ever pay.
Speaker 1: It’s the perfect way to frame it.
The inspector is your expert witness.
They’re paid to find problems.
You’ve show up.
Walk through with them, ask questions.
Is this a cosmetic crack or a structural one?
It’s your best defense against those $10,000 surprises.
Speaker 2: And what are the big ticket items that we need to be focused on?
The true budget derailers?
Speaker 1: You focus on the major systems, the roof.
What’s its remaining life?
Speaker 2: Yeah.
Speaker 1: The foundation drainage around the house, which affects the foundation, the age of the HV AC system.
And critically, the sewer line.
The sewer line replacement can be a 20 or $30,000 nightmare.
Speaker 2: Wow.
Speaker 1: So once you have that inspection report, you have all the leverage.
What’s the negotiation playbook?
Speaker 2: You use those findings to negotiate on price or for seller credits.
And don’t accept a DIY patch from the seller.
Insist on a licensed pro.
Or better yet, take the credit and hire your own person after closing.
Speaker 1: And this is where you lean on your contract safety rails.
Those contingencies for inspection, appraisal, financing, they’re non-negotiable.
And please get owners title insurance.
It’s a one time cost that protects you forever from old liens or claims against the property.
Speaker 2: The ultimate safety rail is knowing when to walk away.
The right house with the wrong terms is the wrong house.
Speaker 1: We mentioned the Year 2 squeeze.
It really comes down to the timing of that tax reassessment hitting right when insurance premiums are also spiking right.
It’s that brutal combination.
The payment you budgeted for in year 1 is just, it’s not adequate for year 2.
You have to plan for that.
On day one, and if you’re buying a condo, you’re sharing financial risk.
You have to vet the HOA’s health as seriously as your own.
You need to review their budgets, meeting minutes and the reserve study.
Speaker 2: What are the red flags in those documents?
What screams future disaster?
Speaker 1: Deferred maintenance.
You see they’ve been putting off a roof replacement or an elevator repair, and you see that their reserve fund.
Thin.
If a big project is coming and the cash isn’t there, you will get hit with a special assessment.
We’ve seen them for 10/20, even $50,000.
Speaker 2: Ouch.
Speaker 1: Now new construction seems safe because everything’s new, but there are traps there too.
Speaker 2: Ohh yes change orders.
Builders love them any little.
Grade you asked for can drastically increase the cost if the locking your budget early and delays and be ready for delays.
You need a buffer for extra rent or storage costs, and your most important piece of leverage is that final payment.
Don’t hand it over until every single item on your final punch list is complete.
Speaker 1: So let’s wrap this up with an action plan the addition lays out.
30 day prep plan.
What’s the essential groundwork from week 1?
Speaker 2: It’s simple discipline.
Pull your credit report, you’re pre approved by two or three lenders and then model your cash needs rigorously.
Down payment that 2 to 5% for closing and a mandatory 6 to 12 month cash cushion after closing.
That buffer is what saves you.
Speaker 1: Let’s just reiterate.
Was non negotiable numbers one last time.
2 to 5% for closing costs, one to 2% of the homes value per year for maintenance, a 6 to 12 month post closing cash buffer and keep your housing costs at or below 28% of your gross income.
Those are your armor.
The bottom line from this edition is really simple.
Buying a home is not about timing the market.
It’s about eliminating surprises.
When you do that, when you price in all the unglamorous costs and defend your right to walk away, you stop being just a buyer and you start being a wealth builder.
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