10 Expenses of Home Ownership You Need to Know
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Are you thinking about taking the plunge into homeownership for the first time? Becoming a homeowner can be an excellent decision for many Americans. Not only does owning a home have several advantages over renting, but it can also be a great way to build wealth over time.
But don't be fooled -- the costs of owning a home go far beyond the sales price. While, yes, your mortgage will likely make up the largest portion of your monthly home expenses, other home ownership expenses can catch the unsuspecting home buyer by surprise. To help you stay prepared, here are 10 expenses of owning a home you might want to be aware of.
Unless you buy your home with cash, you'll need to get a loan from a mortgage lender and make a mortgage payment each month. Part of that payment will go toward your principal balance and part will be used to pay insurance to your lender. This will likely be one of the largest monthly expenses for a house -- second only occasionally to expensive repairs, -- but you can lower it by putting down a larger down payment.
Each year, you'll have to pay property taxes on your home, which are calculated using your home's fair market value and the tax rate for your area. To give you some perspective, the median property tax ranges from a low of $742 in Alabama to a high of $8,928 in New Jersey.
If you have a mortgage, your property taxes are generally paid in monthly installments to your lender. The lender will put the funds in escrow and pay your entire property tax bill on your behalf before it is due.
If you have a mortgage on your home, you'll probably need a homeowners insurance policy. Even if it's not required, it's a smart idea to have homeowners insurance, as it can cover you in the event of catastrophic events such as fires. This expense is also generally included with other monthly bills associated with owning a home, such as principal, interest, and taxes, commonly referred to together as PITI.
Now, it's important to know that some basic homeowners policies don't cover everything, such as floods. If you're in a flood-prone area, you may be required by your lender to obtain a separate flood insurance policy, while some hurricane-prone areas may require windstorm insurance (also a separate policy). Check with a local insurance agent for your required (and optional) types of homeowners insurance if you want an idea of what is best for you.
Calculate your monthly costs of owning a home including property taxes, insurance, and HOA fees using our mortgage calculator.
If you put less than 20% down when you obtain a mortgage, your lender will most likely require you to obtain private mortgage insurance, which will also be added to your monthly mortgage payment. FHA loans have their own type of mortgage insurance, while conventional and other types of mortgage borrowers can obtain private mortgage insurance, or PMI. These house expenses can vary considerably depending on the type of mortgage and how much money you're putting down. Once your loan-to-value (LTV) ratio reaches 80% -- in other words, once you build 20% equity in your home -- you can request to cancel your mortgage insurance.
Lenders often use escrow accounts to store a homeowner's payments for property taxes, homeowners insurance, and mortgage insurance until their payment is due. Your escrow account often doesn't start from zero -- you'll likely be required to make an initial deposit at closing. This will give your account some reserves, in case your property taxes or insurance bills end up being higher than the lender's initial estimate.
Mortgage points are an optional expense you could choose to pay when you obtain your mortgage. You can pay "points" on your mortgage, which is an upfront expense, in exchange for a lower interest rate over the term of the loan. One point is equal to 1% of your loan's initial principal balance, and this expense can be worth paying in many cases -- particularly if you plan to be in the home for many years and the long-term interest savings outweigh the cost of paying points.
Closing costs are additional house expenses you pay to officially close on a home and transfer the title to your name. These costs can vary, but generally run from 1% to 3% of the home's purchase price.
In addition to some of the other expenses mentioned (points, prepaids), common closing costs include loan fees (origination, processing, and underwriting), appraisal costs, title insurance, deed recording fees, document prep fees, and credit report fees, just to name a few.
Most renters are used to paying for certain utilities, like electricity, cable, and internet. When you buy a home, however, you'll start paying for other utilities that you may not have been responsible for before, like water, sewage, and garbage collection. Be sure to budget for the list of bills to pay when owning a house.
If your new home is in a neighborhood (or if you're moving into a condo or townhouse), there's a good chance that you'll have to pay some sort of homeowners association (or HOA) fee. These can vary dramatically based on your location and the services the HOA dues cover. The average monthly HOA fee, according to data obtained by the U.S. Census Bureau, is about $190, while the median is closer to $290.
Here's the biggest wild card category of home expenses you need to prepare for. When you're researching "How much does it cost to own a house?" don't forget to include this category. Your home will need maintenance over time, and if you've been a renter, maintenance and landscaping have probably been your landlord's responsibility. Home maintenance expenses can range from minor costs like replacing your air filters to major costs like replacing appliances or even your roof.
As a general rule, it's a good estimate to expect maintenance expenses to be about 1% of your home's value per year (so, $2,000 on a $200,000 home). This can vary significantly from year to year and can be much higher for older homes.
First-time buyers often have unrealistically high expectations of how much they can afford to spend, simply because they're unaware of the expenses listed above. I'm one to tell -- had I read a list like this before my wife and I bought our first home years ago, I might have been more prepared for the true cost of home ownership!
The bottom line is that by having a realistic idea of what home expenses you can expect, you can avoid getting in over your head with home ownership expenses that are too high before it's too late.
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The primary costs of owning a home can be bucketed into two categories: one-time costs and ongoing costs. One-time costs include items such as a down payment, closing costs, escrow prepaids, and mortgage points you may pay to a lender to secure a lower interest rate. Ongoing costs include your monthly mortgage payment, property taxes, homeowners insurances, utilities, landscaping, and maintenance costs.
For most people, yes. Many new homeowners will discover problems with their house that require upkeep. Issues with appliances, HVAC systems, electrical, and plumbing can quickly add up. While these expenses are typically part of annual maintenance costs, they can be surprisingly high for some homeowners. There is also the issue of lifestyle creep, particularly for people moving from a rental to a bigger space. A bigger home means more space to fill with furniture and other items. This is an overlooked expense for many homeowners.
The first step is to list all of the one-time costs of buying a home. Your real estate agent can help estimate these expenses with you and your mortgage lender will provide a loan estimate with all costs outlined before disbursing your loan. The second step will be to list out all of the ongoing costs, such as your mortgage payment, maintenance costs, and insurances. A good rule of thumb is to add a buffer on top of this monthly total, since many people tend to underestimate the true costs of homeownership.
When you buy a house, your monthly home expenses will look like a mortgage payment, mortgage insurance (if applicable), homeowners insurance, HOA fees, property taxes, and utilities.
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