Maybe you’re looking at a buying a home and not entirely sure what the true cost of home ownership will be. And as a prospective home buyer, chances are good you’ve heard at least one of these sales pitches.
- You can start building equity.
- Owning is cheaper than renting.
- You can fire your landlord.
While these may or not be true, the one true fact remains: buying a home will be the largest financial decision in your lifetime.
Depending on market dynamics, a mortgage can be cheaper than rent. But, when you take into account extra expenses, that advantage disappears fast. That cute property in an up-and-coming neighborhood may also be the recipient of sharply increasing property taxes. If it’s an older home, maintenance could tack on thousands per year in added costs. Think about this – when your hot-water heater goes out, you can’t call the maintenance man because now you ARE the maintenance man.
Therefore, before you sign the dotted line on your mortgage papers, here is a list of things you must-know before making the largest financial decision in your lifetime.
What is the ACTUAL Cost of Home Ownership?
So, you’ve been looking at houses lately online. On one site, you found a mortgage calculator that calculates your average monthly payment. For some properties, the amount is about the same compared to what you already pay in rent. For others, it can be cheaper.
These tools trick countless buyers each year. Shortly after getting the keys to their new home, many encounter costs beyond what they encountered renting. Don’t be caught unaware – here are just a few expenses that will be new to you as an owner.
1. Closing Costs
Think you’re ready to buy now that you got a down payment lined up? Hold on – you’ve got closing costs to account for as well. These pay for title searches, title insurance, and other miscellaneous costs. On average, this expense is between 2.5%-5% of the property’s value. For a $300,000 home, expect to shell out an additional $7,500 to $15,000.
2. Home Inspection
Technically, this step is optional, but it really isn’t. A house that seems solid on the surface can have serious issues lurking within. If the roof is about to fail, paying $500-$1,000 for a home inspection now could save $5,000-$10,000 later.
3. Property Taxes
As a homeowner, you won’t just be paying the bank – the government will have its hand out, too. Let’s say you’re looking at a $300,000 house in Las Vegas. The city assesses an average tax rate of $1.15 per $100 of assessed property value. According to the math, you’d have to pay $3,450 in taxes this year. Unless the economy tanks, this amount will rise each year as the value of your house increases.
4. Homeowner’s Insurance
If a tornado totals your home, you aren’t the only one who loses. The bank does as well, as you’ll likely walk away from your mortgage, leaving them with bad debt. As a result, homeowner’s insurance is practically mandatory – brokers won’t lend to customers who refuse it. Each year, you can expect to pay between $600 to $2,000 in premiums, depending on where you live.
5. HOA and Condo Fees
If you buy a condo or a house in a specific neighbourhood, you may have to pay HOA/condo fees. Here’s why – in these living arrangements, residents use common facilities. These include gyms, common areas, splash pads, playgrounds, and so on. By paying these fees, you’ll be contributing your share of repair and maintenance costs. Expect to pay an average of $200 per month to maintain amenities.
6. Maintenance and Repairs
Of all household expenses, this one is the most insidious. You can go years without a major repair, and then a string of multi-thousand dollar incidents happen. While newer homes have low repair/replacement costs, you should still spend a minimum of $300 annually on preventative maintenance. On average, Americans spend $2,000 per year maintaining their homes.
As you can see, owning your own home is just a bit more involved than renting.
Only One Unexpected Expense Away From Financial Disaster
As climate change worsens, floods, hurricanes, and tornadoes will occur more often, and with greater severity. When it comes to wind, your homeowner’s insurance has you covered. However, most policies do NOT cover flooding.
According to historical records you found at City Hall, your house is outside the 200-year flood zone. However, 200-year floods now happen with disturbing regularity. Knowing this, it’s plausible a 500-year flood could inundate your home, leaving you with a gargantuan repair bill.
What if you live on a hill? Unless you’re among the 22% who don’t live paycheck-to-paycheck, a damaged roof/dead furnace could leave you in dire straits.
Those who don’t plan for the worst are left reeling when the worst happens. In the following sections, we’ll ensure you’re prepared for whatever comes.
Start with a Plan: AKA The Budget
In life, many of us make it up as we go along. According to a 2017 survey conducted by U.S. Bank, 41% use a budget to manage their finances. However, this means a full 59% of us have no plan when it comes to managing our money.
We splurge on that $2,000 tropical holiday, even though it’ll only leave us with $1,000 in checking. Then, we come home to an ice-cold house. Cost to replace the furnace? $3,000. Dang.
With a little fiscal discipline, though, these crises can become minor annoyances. In 2019, the average household took in $60,000. If your mortgage payments are less than a third of your income, you can save up a maintenance fund.
Jump Starting Your Budget
Let’s start by drawing up the foundations of your budget. List all sources of reliable income – these include your paycheck, government grants, alimony, passive revenue, and so forth. If you are self-employed, use your average monthly income over the past year.
Roll Out Your Expenses
Now define your expenses. Add up fixed costs, like your mortgage, property taxes, utilities, child care, and others. Then estimate variable expenses, like groceries. You can do this task by averaging out the cost over 4-8 weeks. Finally, track discretionary spending. Go over several months worth of bank/credit card statements and highlight expenses that were wants rather than needs.
Take your expenses and subtract them from your income. This result will give you an accurate picture of where you stand currently. No matter the outcome, you can likely find efficiencies in your expenses that can help build a maintenance fund.
Start by looking at energy use. According to the World Health Organization, 65 degrees Fahrenheit is the optimal indoor temperature for healthy adults. By turning down your thermostat from 75 degrees in winter, you can save 10% on your heating bill.
At the grocery store, start shopping off-brand. By swapping out all name brands for their generic counterparts, you can save anywhere from 30 to 50% per meal.
Speaking of which, cook more at home. According to Forbes, the average price of a home-cooked meal is up to 75% less than the restaurant’s equivalent.
These are just a few examples. Soon, you’ll expand your surplus at the end of the month, which you can channel into a household contingency fund.
Creating a Safety Net for Future Home Repairs
Saving up a rainy day fund can protect you against financial disaster. However, it still doesn’t prevent the four-figure repair bills when they come due. While these events are inevitable, the sticker shock associated with them isn’t.
A home warranty can even out the annual maintenance when it comes to the cost of owning a home. What are they? Home warranties are service contracts that cover the systems and appliances in your house. Like homeowner’s insurance, you pay a monthly premium. Whenever something goes wrong, you call your firm. After confirming they cover your issue, they dispatch a technician to your address to fix it. Apart from a small deductible, you pay nothing out-of-pocket.
Instead of paying $300 to fix the stove in February, $1,000 for the air con in July, and $3,000 for a new furnace in December, you only pay monthly premiums, plus deductibles. The average home warranty costs about $800/year, or $66.50/month – think you can find room in your budget for that?
Also, there are so many different home warranty companies to choose from and it can be overwhelming to find which one is the best for you. They all tell you they’re the best, but are they the best for you?
I am a huge fan of ReviewHomeWarranty.com to get a list of the best home warranty companies right now. Look over and compare the top-rated home warranty companies and then make the choice on which is best for you.
Make Your Home a Blessing – Not a Curse
Owning a home can be one of the biggest blessings or one of the greatest curses of life. Before you hire a real estate agent and make the largest financial purchase in your lifetime, know your numbers.
It’s up to you to determine how much you can really afford based on what we explained in this post. Remember, there are more costs than what the real estate agent and mortgage calculator will tell you. Create your plan, stick to your plan, and let your new home be a blessing.