MW Home buyers are getting relief from lower mortgage rates. But these phantom costs could sneak up on them.

By Aarthi Swaminathan

The true cost of homeownership can sometimes sneak up on homeowners

Mortgage rates are down to a nearly three-month low. But if cheaper home loans have you thinking of buying a house, it's a good time to remember some hidden costs of homeownership that go beyond the mortgage and interest payments.

Elevated mortgage rates have been a pain point for home buyers over the last few years. High interest rates have pushed up borrowing costs, making it more expensive to take on a mortgage. As a result, home-buying activity has ground to a virtual halt as buyers have pulled back from an increasingly expensive real-estate market.

Against this backdrop, lower mortgage rates - particularly ahead of what's traditionally the busiest season for home buying - could put wind in the sails of some home buyers. Mortgage rates fell for the fifth week in a row in mid-February, and the 30-year fixed-rate mortgage fell to its lowest level since December 2024, according to Freddie Mac (FMCC).

The 30-year rate averaged 6.85% as of Feb. 20, the housing-finance giant said. Separate data by Mortgage News Daily had the 30-year fixed-rate mortgage averaging 6.96% as of Thursday afternoon.

Even though rates are not expected to drop significantly for now, "slight dips could prompt some eager buyers to act, taking advantage of the growing number of homes on the market," Lisa Sturtevant, chief economist at Bright MLS, said in a statement.

On a median-priced home of $400,000 with a down payment of 20%, the monthly payment with a mortgage rate of 6.85% would be nearly $2,100. With a down payment of 3.5%, that monthly payment would be more than $2,500.

But the monthly mortgage payment isn't the only factor that prospective homeowners need to consider as they weigh whether they can afford a house. Personal-finance author Ramit Sethi, who hosts a show on Netflix $(NFLX)$ called "How To Get Rich," warned in a recent post on X of the "phantom costs" that can unexpectedly drive up homeowners' expenses.

These costs, which home buyers may overlook when they're house hunting, can include property taxes, insurance premiums, utilities, maintenance costs and garbage collection.

Sethi's post referred to a homeowner who bought a house three years ago and had an initial mortgage payment of $1,875. After various expenses swelled, their monthly housing costs grew to $3,300 a month.

Sethi, who has referred to such homeownership costs as "hidden fees," said in a June 2023 post that homeowners often fail to take these costs into account when they're deciding whether it's better to rent or buy.

"They don't realize the true expense until it's too late," he wrote, adding, "Rent is the MAXIMUM you will pay, but a mortgage is the MINIMUM you will pay." Sethi did not respond to a request for comment.

Those so-called phantom costs can add up over time - and even balloon for some homeowners.

Since the start of 2020, the elements that make up a mortgage payment - principal, interest, taxes and insurance - have increased between 15% and 17%, according to a report from Intercontinental Exchange $(ICE)$. Property insurance, however, has soared 52% over the same time span.

Insurance premiums now make up more than 9.4% of monthly costs for homeowners with a mortgage on a single-family home, according to ICE. That's up from an average of less than 7.7% from 2013 to 2020, and the highest share on record.

"In higher-risk areas such as New Orleans, the share of the mortgage payment earmarked for insurance can be as high as 25%," ICE's Andy Walden said.

Figuring out a home buyer's true budget

Another key point for buyers to remember is that even though they may qualify for a certain mortgage amount based on their gross income, "in reality, it's your net income that you're living on," said Carolyn Morganbesser, assistant vice president of mortgage originations for Affinity Federal Credit Union. "And that's vastly different by the time health insurance and 401(k) and taxes" kick in, she added.

Going through each expense, line by line, and then figuring out a home buyer's true budget is "really an eye-opening experience for a lot of people," she noted.

When buyers are trying to figure out whether they can afford a property, they should also consider how much they're spending on other debt, such as their car loan, and factor in variable costs like utilities, Morganbesser said.

Case in point: Last month, due to an intense arctic cold front, the heating bill for her home in upstate New York soared to about $400, she said.

In fact, cold weather is expected to push up the average cost of heating a home this winter by nearly 9% from a year ago, to $941, and utility debt is expected to hit a record high, according to the National Energy Assistance Directors Association.

Buyers should tally all types of personal expenses when calculating their housing budget, advised Morganbesser, who has been in the mortgage industry since the 1980s. From how much a family pays for streaming services to their monthly utility bills, they should throw it all in.

"What if you want to go out to dinner? Or what if you need a car?" she recalled telling a previous client. "What payment are you comfortable with making?"

To be sure, home buyers aren't oblivious to the rising cost of homeownership.

In fact, based on one survey of loan officers by HomeLight, a real-estate marketplace that connects buyers and sellers, the two biggest fears shared by buyers - aside from affordability - were about long-term property taxes or fees becoming unaffordable, and not being able to afford home insurance. Home insurance is typically required when a buyer uses a mortgage to purchase a property.

-Aarthi Swaminathan

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February 21, 2025 06:00 ET (11:00 GMT)

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