True Cost of Home Ownership – Total Expenses, Hidden Fees & Taxes
The decision to rent or buy a home doesn’t just come down to comparing a neighborhood’s market rent to the principal and interest payment that a mortgage would cost. Neither, for that matter, does it come down to being able to pick your own paint colors or knock down walls.
Owning a home costs far more money than the average first-time homebuyer realizes. Beyond dollars and cents, it also comes with less tangible risks and downsides.
Before you write a check for $300,000 to buy a home, keep the following costs and risks in mind.
Financial Costs of Home Ownership
Some of the financial costs to own a home are obvious. Others, not so much.
As you create a monthly budget and plan out how much home you can afford, make sure you include all costs in your calculations.
Maintenance, Repairs, and Capital Improvements
New homeowners almost never fail to underestimate the cost of maintenance, repairs, and capital improvements.
Every single item in a house comes with an expiration date. From the hot water heater to the furnace, the pipes to the ductwork, the wiring, the framing, the joists, the flooring, the roof, the drywall, even the paint on the walls — it all deteriorates over time.
I hear homeowners say things like “Well, this year my budget got thrown off because I had to replace the furnace, but next year I’ll get back on track with my retirement savings.” Except they won’t, because next year it will be the roof. The year after that it will be the hot water heater. Then replacing the carpets, and so on, ad infinitum.
You still need to include irregular expenses in your monthly budget, even though they don’t hit you every month. As a landlord, I budget 10% to 15% of the rent each month for repairs and maintenance. It goes into a separate account that I tap when I get hit with a big repair bill.
The exact amount you should budget each month for your home’s inevitable maintenance and repair bills depends on the age, size, value, and overall condition of your house. For all their charm, older homes do require more maintenance. And pricier homes require more upscale finishes and materials.
Consider setting aside 15% of your monthly mortgage payment in a separate high-yield savings account at CIT Bank. You can leave it untouched until a home maintenance bill hits you.
Lawn Care and Landscaping
Aside from condos, most homes come with surrounding grounds, which require maintenance of their own.
At a minimum, that typically means spending an hour or so each weekend mowing the lawn, at least during the warmer months. Or paying someone to do the work for you. But it could also mean caring for bushes, shrubs, gardens, trees, and other vegetation on your property.
For that matter, you might also need to rake leaves, remove weeds, clean gutters, shovel snow, salt ice, and otherwise keep the outdoor areas orderly. As an apartment dweller who rents my home despite owning other rental properties, I don’t have to worry about these headaches and costs.
Condo or HOA Fees
Of course, you could buy your own apartment, better known as a condominium. But you’d still end up responsible for maintaining the grounds and common areas.
In this case, that responsibility comes in the form of monthly condo fees. These usually cost hundreds of dollars each month, taking a real bite out of your monthly budget.
Even many single-family homes incur similar fees, as owners pay into a homeowners association (HOA) each month. Although usually less than condo fees, you still have to do all the lawncare and maintenance on your home, plus pay monthly fees. And then you get the privilege of being told what you can and can’t do around your home, like adding a shed or fencing in your yard, if your HOA has such restrictions.
As a final word of warning, remember that these fees can change. You might buy a home with a $100 monthly fee, only to have it double the following year. Or you might get hit with a special assessment: a one-time fee to pay for some large community expense, which you may or may not want anything to do with but must pay for nonetheless.
Among the more obvious homeownership expenses, every homeowner in every state must pay property taxes. They vary wildly, from a median of $658 per year in Alabama up to an astounding $7,800 median tax bill in New Jersey, per the National Association of Home Builders.
Bear in mind that the existing property tax bill when you buy a property doesn’t necessarily represent the bill you’ll pay as a homeowner. Local governments look for any excuse to assess property values higher — the better to raise taxes on you, my dear. And the easiest excuse in the book is your purchase transaction.
Expect your local municipality to raise your tax assessment to the purchase price you paid. That means you have to calculate the future property tax bill based on the local tax rate and your purchase price. Then forecast a 2% rise in property taxes each year thereafter.
Welcome to homeownership!
You may have skated by without renters insurance as a tenant, but you can’t skip homeowners insurance as a property owner.
To begin with, your mortgage lender requires evidence of coverage every year, no exceptions. Fail to provide it to them, and they’ll go out and buy coverage for you — usually at exorbitant rates — then bill you for it.
But even if you bought a home in cash, you still need homeowners insurance. Otherwise, you’d find yourself living on the street the next time a pipe bursts, or a fire breaks out, or any other all-too-common disaster strikes. PolicyGenius allows you to compare multiple insurers in minutes. You’ll find the coverage you’ll need at a price you can afford.
If you make a down payment under 20%, your lender requires you to pay for mortgage insurance. Every single month.
Among conforming loans such as Fannie Mae and Freddie Mac loan programs, lenders call this private mortgage insurance (PMI). Among FHA loans, it’s called mortgage insurance premium (MIP). But the difference doesn’t end at nomenclature — borrowers can apply to remove PMI from their monthly payment when their balance dips below 80% of the property value. Borrowers with FHA loans must now pay MIP for the entire life of their loan, regardless of how far they pay down their balance.
When shopping around for mortgages, make sure you get estimates for mortgage insurance costs if you plan to put down less than 20%.
Of all the expenses above, you’re probably most familiar with utilities. Many renters pay these already and know the drill.
Or think they do. But as someone who’s lived in everything from a small apartment with modern energy efficiency to a 150-year-old historic house, I can assure you that utility bills run the gamut from “mild inconvenience” to “there’s no way this can be accurate — wow, I’m screwed.”
Get the best sense you possibly can for the typical utility bills before you buy a home. That includes not just last month’s bill, but normal bills for each season. Energy bills can triple between gentle October weather and the blizzards of January.
Oh, and size matters. The larger the home you need to heat, cool, and power, the higher your energy bills will be.
Risks and Less Tangible Costs
The downsides of homeownership don’t end with the dollars and cents. Make sure you fully understand the following risks before signing on the dotted line.
Loss of Mobility and Flexibility
Renters can up and move to a new home when they get a job offer in another city, or get pregnant, or need to move in with their aging parents. Homeowners can’t, at least not without incurring enormous costs and headaches.
When you buy a home, you take an initial loss due to closing costs. Over time, you gradually recover that loss as you build equity, both from paying down your mortgage balance and — hopefully — from appreciation of your property’s value. Then, when you go to sell, you pay tens of thousands dollars in additional closing costs, this time on the seller’s side of the transaction.
In other words, it takes time for homeowners to build enough equity to cover both rounds of closing costs — time during which you’re effectively locked into owning the home if you don’t want to take a loss.
The Risk (and Stress) of Depreciation
Ask anyone who lived through the housing bubble and the Great Recession, and they’ll tell you as many horror stories as you can stomach about what happens when home values drop.
It happens. Home prices aren’t an elevator that only go up. And I can tell you firsthand, it’s not fun when $50,000 of home value evaporates seemingly overnight.
At best, it makes you feel poorer and limits your options for moving. At worst, it can trap you in a home you no longer want to live in, potentially with a partner you no longer wish to share a life with.
Uninsured Risks to the Property
Homeowners insurance doesn’t cover every conceivable source of damage to your property.
It doesn’t cover external flooding, for example. That requires separate flood insurance, which can get expensive if your property sits in a flood plain or frequent hurricane paths.
Mold isn’t necessarily covered by your homeowners insurance either. Insurers typically only cover mold remediation — which can cost hundreds of thousands of dollars — if the mold was caused by a “covered peril.”
Likewise, homeowners insurance doesn’t normally cover termite damage. Or terrorist attacks. Or acts of war, or acts by the government.
Speaking of which, insurance certainly doesn’t cover changes in housing regulation. The rules today about lead paint, asbestos, and radon are far different than they were 50 years ago, leading to many homeowners getting stuck with the bill to bring their homes up to new regulations.
More Discipline and Budgeting Required
As a renter, I don’t have to budget for home repairs each month. When I was a homeowner, I did.
I paid thousands of dollars toward home updates each and every year I lived in my own home. It took me longer than I care to admit before I set up a separate emergency fund for home maintenance and repairs.
Contrary to popular messaging, not everyone should own their own home. Not everyone has the means or financial discipline that it takes to set aside extra money each month for irregular expenses, or the responsibility to constantly care for such an expensive asset. Know thyself: if you struggle with maintaining a monthly budget and an emergency fund with at least one or two months’ expenses, then work on paying off unsecured debts and improving your financial literacy before buying real estate.
False Sense of Wealth
Too many homeowners feel a false sense of wealth when they discover they have equity in their home. “I have $100,000 in equity in my home? That’s great! How do I tap into it?”
They often proceed to do just that, pulling out equity by taking on debt. These new debts cost them money in interest, and send their net worth tumbling in the wrong direction.
Home equity might make you feel rich, but unlike money in true investments, home equity doesn’t “work for you” by compounding. And the only productive way to realize that money is by selling your home.
Buying a home is one of the largest financial commitments you ever make in your life. Don’t enter it lightly, and certainly don’t justify your decision with tortuous logic like “but it’s an investment” or “but I’ll get great tax breaks.” Your home is not a true investment unless you house hack or otherwise generate income from it, and 90% of Americans take the standard deduction per the Tax Policy Center, nullifying any homeowner tax deductions.
Homeownership helps many Americans grow their net worth and brings the joy of fuller control over your home. Yet it also comes with enormous responsibilities, costs, and risks that too many homebuyers gloss over in their excitement to buy their dream home.
As a general rule of thumb, don’t buy a home if you aren’t reasonably certain you’ll live there for at least three years, and preferably five years. Never feel shame for renting, which comes with perks such as flexibility, minimal maintenance and repair responsibilities, lower financial risks, and easier budgeting.
Buy a home if the time is right, but don’t force it, and include all costs and risks in your decision.
Published at Wed, 03 Feb 2021 19:39:24 +0000