What is the Actual Cost of Home Ownership?
There are many costs and benefits involved in owning a home. In order to ensure that your home purchase is a sound financial decision it is important to understand everything that goes into owning a home so that you can make an informed decision before you buy.
A monthly home payment is broken down into mortgage principal and interest, property taxes, and homeowners insurance (PITI). If you get a fixed rate mortgage, your principal and interest payments are guaranteed not to change for the entire life of your loan until it is paid off in full. Insurance and taxes can vary depending upon your locality and insurer.
Inevitably, there will be other costs associated with your home, and it is important to consider all of them before making any sort of home ownership decision. The following are just some of them:
Taxes and Insurance:
Your homeowner’s insurance premiums will likely remain relatively constant throughout your mortgage, barring any major claims. Usually insurance costs escalate slowly over time. However, property taxes can increase every year, and the increase could be dramatic. Depending on where your location, your property tax bill could increase each year anywhere from 1% to 10%, with 3% to 5% being the normal range just to keep up with inflation. While that may not sound like a lot, a $500 per month tax bill growing 4% per year will become $750 per month within 10 years and over $1,000 per month within 20 years. Buyers should research their town or city history of tax increases to get an idea of your estimated future higher tax payments.
Renters may be used to paying for some utilities but as a home owner, you are responsible for all utilities and services. In many cases, tenants are responsible for electricity, heat, hot water heating, cable, Internet and phone services. Home owners, however are also responsible for water and sewer (or well and septic) costs, garbage collection and snow removal (among other service costs).
One area where home buyers traditionally underestimate costs is for home repairs. For example, most of the equipment in your home, such as furnaces, cooling systems, and appliances will require some degree of maintenance, and much of this equipment will need to be replaced if you stay in your home for long enough. In addition, home owners need to budget for replacement of items such as roofs, windows, gutters, and driveways. Before you buy a home it is important to learn the age of the components of the house in order to find out if they will soon need to be replaced. For example, a typical hot water heater lasts between 7-12 years.
Other home owner fees:
Finally, home owners may be subjected to condo association fees, road maintenance fees, home owner’s association fees, and special assessments. For example, when you own a condominium, you will be responsible for monthly condo association fees. But in some cases condominiums have under-budgeted for expenses and are forced to impose special assessments on owners that can add to your condominium fees for years. It is crucial that you look into this if you are buying into a condo association or a home in an area with a home owner’s agreement.
These are just some of the non-mortgage costs associated with homeownership. There can (and will) be many others, and they are often unexpected (especially repairs). It is important to take all of these potential costs into account when you are trying to figure out how much home you can afford to buy.