Owning a home can be a smart move for both economic and emotional reasons. When you own a home, you get to call the shots, and from a financial perspective, owning means building equity in a property as opposed to throwing money away on rent month after month. Of course, the one major drawback of homeownership is the cost involved, and we're not just talking about the down payment. There are numerous costs of owning a home that can sneak up on you almost out of nowhere, so before you sign those mortgage documents, make sure you're prepared for what may lie ahead.
1. Property taxes
You're probably aware that once you close on your home, you'll need to start paying property taxes. But don't get too comfortable with the amount you start out paying, because property taxes have a way of going up over time. Even during periods when homes decline in value, property taxes can still increase. Back in 2000, U.S. homeowners collectively paid an estimated $247 billion in real estate taxes. By 2010 -- not long after the housing bubble burst, and well before the housing market recovered -- that figure had climbed to $476 billion.
All it takes is for your home to be reassessed at a higher value to see your property taxes get an instant hike. Similarly, if your city or town is approved for a municipal tax increase, your taxes could go up even if your property's assessed value stays the same or actually drops. Keep in mind, too, that making improvements to your home could also raise your tax bill. If that new deck or finished basement increases the value of your home, your taxes might quickly follow suit.
2. Maintenance and repair costs
That beautiful lawn that made you fall in love with your home will need to be mowed every week in the summer, just as that extra-long driveway will need to be plowed when it snows during the winter. But it doesn't end there. Your gutters will need to be cleaned every season, your heating and cooling system will require an annual checkup, and your wooden deck will need to be painted and sealed once a year to keep it from rotting.
Ongoing maintenance is pretty much a given when you own a house, and over time, the cost of general upkeep can really add up, especially when things get older and start to break. In fact, you should plan to spend between 1% and 4% of your home's value on maintenance and repairs each year, which means that if your home is worth $500,000, you might dish out anywhere from $5,000 to $20,000 annually.
Now if you own a condo or co-op, as opposed to a stand-alone property, your maintenance costs may be lower. In fact, you'll probably pay a monthly maintenance fee (as part of your homeowners' association fee) that covers your basic expenses. But if something goes wrong and your property needs repairs, you'll most likely be on the hook for the difference, which can be a real financial blow.
3. Homeowners' insurance and HOA fees
When you buy a condo, co-op, or townhome, you're required to pay homeowners' association (HOA) fees. But stand-alone houses are often subject to HOA fees as well, and it's not just those located in gated communities. Even ordinary subdivisions can come with HOA fees, which can easily cost you several hundred dollars each month. Now if you're obligated to pay HOA fees, those fees will be disclosed to you when you purchase your home. But just as property taxes have a way of going up, so too do HOA fees.
The same holds true for homeowners' insurance, which is not necessarily included in your HOA fee. According to the National Association of Insurance Commissioners, the average homeowners' insurance premium rose by 5.6% in 2012 and 6% in 2013. So let's say you start out paying $800 a year in homeowners' insurance, but that your rate increases 5% a year. After five years, you'll be paying a premium of over $1,000.
While owning a home can be a wise financial decision, it can also end up costing you way more than you anticipate. That's why if you're buying a home, coming up with a down payment isn't enough. You'll need some extra savings on hand to account for the many unknowns that come with owning a home, and the greater your reserves going into it, the better prepared you'll be for what's likely to come.
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