The Real Cost of Owning a Home
You’ve bought your first home, and you love it! You’ve painted the walls in bright colors, planted a tree, and adopted a large dog that most landlords would never allow.
Then, one day the kitchen faucet springs a leak and you come home to a small pond on the floor. Your first impulse may be to call the landlord, but then you remember—this is your home, and you are responsible for cleaning up the mess.
As all first-time homeowners quickly discover, the costs of owning a home go well beyond the monthly mortgage payment. Most of these costs are predictable and, with research and careful planning, you can be sure to buy a home you can truly afford—even with all the extra expenses.
Property taxes vary, but every state collects them. Two factors figure into the property taxes you pay:
- Tax rates. Many government entities such as states, cities, and school districts collect property taxes. The rates can fluctuate every year.
- The value of your home. The higher your home’s value, the higher your property taxes.
As you are working out how much you can spend on a house, be sure to consider whether your budget can accommodate increases in property taxes.
- Investigate whether tax rates in your area have increased over time. If they have, try to estimate how much these increases could add to your property taxes in the future.
- Consider how likely it is that homes in your area will increase in value and how much of that increase will be taxable. For owner-occupied homes, many taxing jurisdictions limit how much of a house’s increased value can be taxed, but value increases almost always lead to at least some increase in taxes.
On the upside, you can deduct property taxes from your federal income taxes.
Of all the costs associated with homeownership, repair expenses are the hardest to predict and plan for. These expenses may result from:
- Storms (hail, high winds, flooding, and other natural disasters)
- Water leaks
Although homeowners’ insurance covers many of these situations, it does not cover all natural disasters (many policies exclude flood and earthquake damage). And even when the policy covers the damage, you still have to meet the deductible and pay any expenses the policy doesn’t cover.
Maintenance needs are predictable, but costs can be difficult to estimate. These costs can include:
- Servicing HVAC systems—Heating, ventilation, and air-conditioning (HVAC) systems and other appliances such as water heaters, washers, dryers, and ovens require maintenance to keep them performing optimally. Most HVAC systems use filters that have to be replaced monthly. In addition, it’s a good idea to have HVAC systems serviced once a year to maintain optimal function and energy efficiency.
- Replacing major appliances—If any major appliances such as the refrigerator, oven, or washer and dryer are included in the house purchase, find out how old they are and how long they are likely to last so you can plan for replacing them in a timely manner.
- Pest control—If you live in a region where termites and other destructive or unpleasant insects are common, you may find that contracting for regular pest control is a good idea.
- Yard care—Yard maintenance is not always optional. Many cities and subdivisions have ordinances that require you to keep grass and weeds below a certain height. You may need to invest in a mower or hire someone to keep your yard in decent shape.
- Roof replacement—Roofs wear out over time. If you’re considering buying a house, make sure you know how old the roof is and when it likely will need to be replaced.
Mortgage insurance—Buyers who pay less than a 20 percent down payment usually are required to purchase mortgage insurance (also known as private mortgage insurance or PMI), which protects the lender in case the borrower defaults.
- Mortgage insurance premiums vary between about 0.25 percent and 1.5 percent of the loan amount per year.
- Lenders often require you to pay mortgage insurance payments as part of your monthly escrow payments. Borrowers usually can cancel their mortgage insurance once they have paid off a certain amount of their loan—typically when their loan balance is 78 percent of the home’s sale price or current appraised value.
- Note that Federal Housing Administration (FHA) loans have unique terms including an upfront mortgage insurance premium of up to 1.75 percent and a requirement that the mortgage insurance remain for the life of the loan. For more details, visit the FHA website.
Homeowners’ insurance—As a condition of the loan, lenders almost always require borrowers to have homeowners’ insurance so that the lender can recoup the loan should the home be destroyed.
- Required or not, having homeowners’ insurance is a good idea—not only can it help a homeowner rebuild in case of fire or storm damage, but also it usually covers losses of personal property and provides liability coverage for accidents that occur in the home or on the property.
- Rates vary widely, and coverage can vary as well. The most common form of homeowners’ insurance does not cover losses due to earthquakes, floods, and termites. Before you buy a policy, make sure you understand what it does and does not cover.
Homeowners’ Association Fees
Almost all condominiums and some single-family homes in subdivisions charge homeowners’ association (HOA) fees.
- These fees typically cover maintenance and improvement of common areas, such as lobbies, building exteriors, garden areas, and pools.
- HOA fees should be clearly stated as part of a real estate listing. However, if you are thinking of buying a property that has an HOA fee, you may want to research the rules governing HOA increases and find out how often and how much the HOA has raised fees in the past.