Don’t Forget to Budget for These Hidden Costs of Home Ownership
What’s the real cost of owning a home? While most people are prepared for down payments and monthly mortgage costs, the routine and “emergency” bills that come with owning a house make up the true cost of homeownership. Some extra costs baked into standard mortgage payments also cause monthly homeownership expenses to creep beyond what quick mortgage estimates show.
Here’s a look at some of the not-so-obvious costs of buying a house.
How Much Should Your Total Monthly Cost of Owning a Home Be?
“Lenders usually require the PITI (principal, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 25% to 28% of monthly gross income,” according to the Federal Deposit Insurance Corporation (FDIC). It’s more important to look at costs in relation to personal income and home price when considering the financial feasibility. Here’s a look at common monthly home ownership costs.
Property Taxes
While mortgages may end after 30 years, property taxes are forever. Property taxes vary by location. While property tax is assessed based on a home’s value, towns and cities in different states use different rates for taxation. In some low-tax states, property taxes are just a few hundred dollars per year. Residents of high-tax states can see five-figure tax bills.
Looking at a property’s tax history will give a potential buyer an idea of how much they’ll owe. Most homeowners lump their property taxes into their monthly mortgage installments. Lenders put tax funds in escrow to pay the entire bill off before its due date.
Homeowner Insurance
Proof of a homeowner policy is needed to close on a home when financing through a mortgage company or bank. According to Forbes, the average cost for a $350,000 policy is $1,582 per year.
Homeowner insurance protects against catastrophic damage. While flood insurance isn’t standard, homeowners in flood-prone areas are required by lenders to obtain special flood insurance. Homeowners can choose add-on coverage for dozens of items.
Homeowner Association (HOA) Fees
If a property is part of a homeowner association, property owners must pay HOA fees that range from a few dollars per month to several hundred dollars per month. These HOA fees go toward covering costs for maintenance, pool upkeep, building insurance, and other “common” expenses.
Homeowners must pay HOA dues monthly or annually. In some cases, they may be due from the buyer at closing. Unlike expenses that homeowners can cut from the budget or negotiate, HOA fees don’t have an opt-out option. They also tend to go up each year.
Routine Home Maintenance
While some homes are “turnkey” properties, allowing the homeowner to move in without renovations, no home is a maintenance-free property. Homeowners need to address both aesthetic and safety upkeep on a daily basis.
Here’s a look at the potential hidden maintenance costs that many starry-eyed buyers don’t think about when scrolling through available properties:
- Mowing, weeding, seeding, watering, raking, and other forms of lawn care.
- Touching up interior or exterior paint.
- Replacing broken light fixtures.
- Preventing/eliminating pests.
- Clearing gutters.
- Installing gutter guards.
- Cleaning pools and hot tubs (if applicable).
- Refinishing and resealing decks and porches.
- Fixing or replacing broken appliances.
- Shoveling.
- General landscaping.
A DIY approach is a way to cut costs on home maintenance. However, even frugal homeowners may need to fund purchases for essential tools and equipment that allow them to tackle tasks on their own.
Utilities
What bills do you pay for a house? The list of bills to pay when owning a house includes heating, cooling, electricity, water, sewer, internet, and phone. While wells, septic systems, and other “independent” utility sources may not involve monthly charges, homeowners are responsible for the upkeep and replacement of these systems.
Apartment dwellers on the hunt for homes aren’t strangers to utility costs. However, they may not expect the jump in costs that happens when moving from an apartment to a house. For renters who already rent homes or condos without utilities included, there shouldn’t be any surprises. However, the increase when going from a one-bedroom apartment to a house with 1,500 to 3,000 square feet of space can be substantial. Asking to see recent utility statements before closing can help a buyer anticipate specific bills.
Major Expenditures and Repairs
While the routine expenses of owning a home can feel like a lot to battle, homeowners need to prepare for emergency repairs, replacements, and other major expenditures. When a major system in a house fails, it’s often necessary to fix the issue immediately to avoid serious long-term damage. Common major expenditures that homeowners should be budgeting for include:
- Replacement of HVAC systems.
- Plumbing system failures.
- Repairs and remediation following water damage.
- Roof replacement. According to the US Department of Energy, the average cost to replace a roof is about $10,000.
- Driveway repaving.
- Door or window repairs.
- Mold remediation.
- Well or water system replacements.
- Repairs for a faulty foundation.
Each of these repairs can cost anywhere from several hundred to several thousand dollars. While homeowners can finance some major home expenditures through personal loans or home equity lines of credit, homeowners should put away money for unexpected costs.
Private Mortgage Insurance (PMI)
For buyers putting down less than 20% at closing, lenders require something called private mortgage insurance (PMI) that’s added to each monthly mortgage payment until the mortgage has been paid down to the loan-to-value (LTV) ratio of 80%. PMI can total between 0.5% and 5% of the original amount of a mortgage.
“True” Monthly Mortgage Payments
The “quick math” used to break down the total monthly cost of home ownership based on mortgage payments alone isn’t the whole story. Most people only look at the principal when getting a rough idea of how much it is to own a house. However, principal only refers to the portion of a mortgage payment that goes toward reducing the loan balance until the home is paid off.
The total monthly cost of owning a home before factoring in maintenance, utilities, and other extras is determined using the acronym PITI which stands for principal, interest, taxes, and insurance. Interest is the rate a lender charges on the loan. As covered above, taxes and insurance both increase homeownership monthly expenses based on the rates charged for a specific property.
Home Buying Costs
Some of the expenses of owning a home need to be paid before buyers can even get the keys. Closing costs and cash to close are the two big pre-purchase types of home costs.
While closing costs refer to all of the service fees needed to close on a loan, cash to close refers to the total amount that the buyer will need to bring to closing. Cash to close includes closing costs.
According to Freddie Mac, the average amount needed to close on a $250,000 house after putting down 20% on a 30-year mortgage is $7,625. Freddie Mac also suggests that buyers factor these amounts into the cost to buy a house:
- Down Payment: Totaling anywhere from 3% to 20% of a home’s purchase price, a down payment helps to determine what monthly payments look like by cutting into the loan amount.
- Earnest Money Deposit: Buyers need to produce 1% to 2% of a home’s purchase price when making an offer. Also known as the good faith deposit, the purpose of this payment is to demonstrate seriousness to a seller. The earnest money total can be applied toward closing costs or the down payment.
- Home Inspection: Most home inspections cost between $300 and $600. When checking for mold or other non-standard issues, prices are higher.
- Closing Costs: Accounting for 2% to 5% of a home’s purchase price, closing costs are paid to the lender, real estate agent, title company, and other people involved in the transaction. Common closing costs include government record fees, appraisal fees, credit report fees, lender origination fees, title service fees, tax service fees, survey fees, attorney fees, and underwriting fees.
- Moving Expenses: While often overlooked during the excitement of finding a home, moving expenses can become sizable when making a long-distance move that involves professional movers or rental trucks.
How Much Does It Cost to Be a Homeowner?
The answer depends on the size, location, and value of a home. Once the lump payments for closing and a down payment are finished, homeowners must focus on maintaining a monthly mortgage bill that includes taxes and insurance.
Budgeting for recurring utility, maintenance, and repair costs also needs to be prioritized. For some homeowners, taxes represent the single biggest annual home expense outside of the actual mortgage payment.
For others, living in an area with pricy utilities requires special budgeting. Of course, homeowners with older homes should tuck away more money each month to handle repairs and major upgrades.