The Costs of Home Ownership: What They Don’t Tell You

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Yeah, I know there has been a lot of debate about the upside of buying a home, and how in recent years, values have plummeted to historically low levels, but that’s not what this is about.  This isn’t about weighing the merits of ownership versus renting in terms of cost-value analysis either.  

This is simply an informational summary of the total costs of owning a home; the costs that no one talks about when people tell you what the mortgage payment will be or when people talk about the tax benefits of home ownership.  You see, there are a bunch of things that you will be responsible to pay for in addition to pay for outside of the mortgage, and not everything will be a deduction when it comes time to file your taxes.  

And, unless you are lucky enough to have a really good real estate agent or friend/family/coworker (or me!) to prepare you for any or all of these costs, you will have to find out the hard way–on your own.

 

Costs of Home Ownership
The real costs of owning a home can leave your pockets empty

 

You’re paying more than just a mortgage

When you go to contract on a home (whether it be a single family, town home, or condo) the main numbers discussed are mortgage payment and closing costs.  You usually only worry about getting your credit in line so you can get the lowest interest rate and having to bring the least amount of money possible to the table at the closing and being able to come up with that money, naturally. Unfortunately-and this usually happens to younger, first time home buyers-what you don’t normally hear much about are the costs property owners have to deal with sometimes far off into the future.  Things you may/will have to face at some point include:

 

Outward Appearances

No one wants to be the home on the block to stand out for “negative reasons”.  Most people want to fit in with their neighbors and project similar, if not a more lucrative lifestyle so they will do whatever it takes to keep up appearances.  Putting in a pool, getting a crew to design a beautiful landscape, putting a full entertainment center or outdoor kitchen on the patio all will cost you significantly.  It doesn’t end with just the cost of installation, however.  You also have to keep in mind the increase in the home’s assessed value when it comes to real estate taxes, not to mention the increase in your utility bills as well as continued upkeep.  Even if you do some of the things yourself, the time and work needed at any time is time that you don’t have to actually enjoy any of that stuff. 

 

Insurances

If you take on a mortgage, more likely than not, you will be forced to take out and insurance policy with certain minimum coverages. Then, you have to obtain other insurances based upon your location (ie: flood or wind zones) that may require secondary policies if you primary provider doesn’t offer such coverages.  Of course, it is also an integral part of financial planning to have your investments and other personal items, particularly valuables and/or family heirlooms insured in case of unforeseen events, but it is also not something that is talked about much when the discussion comes to buying a home.

 

Unexpected Surprises

Things won’t always turn out as you expect them once the purchase process is complete.  You may realize that your furniture just doesn’t fit the way you envisioned when you did your walk-through. Appliances may break, even if they are reasonably new. You may do some damage when moving into the home.  Stuff happens, but sometimes we don’t plan for it or even consider the possibilities of it happening, and they generally don’t happen just once.  It’s important to understand all of the various mishaps that can occur and be able to handle them financially.  Having an “emergency fund“, or whatever you want to call it is a good start.  Just understanding the fact that these kinds of things can take place will put you ahead of the curve in terms of not being completely taken off guard and scrambling to figure out what to do next.

 

Home Owners Association or Condo Association Fees

Again, this depends upon where you live.  A homeowners association sets the rules by which you will have to abide by, and you even get to pay them to do so!  And, that’s generally on our  mortgagee payment unless the community you buy in has some sort of escrow requirement that the lender works into your payment.  Many communities have associations that require monthly or quarterly dues to pay for common areas such as pools, clubhouses, parks and facilities. They also cover the landscaping, security, and possibly certain utilities if the community has a contract with the cable company for example.  These associations set guidelines such as the colors that exteriors can be painted, parking rules, and “policing” the properties in order to maintain the property values by ensuring that the landscaping is done, roofs and sidewalks are clean, and lots are kept up to standard.

 

Maintenance

Every home needs up keeping, whether it’s replacing appliances, air conditioning maintenance, pest control, landscaping, whatever. If you live in an area that has an association, certain things are likely to be required, such as the landscaping and power washing of the roof and sidewalk (as mentioned above).  Some people will say that it’s more financially prudent to take a do it yourself approach, but it is always best to hire a professional if:

 

1. You have no experience in doing something like climbing onto a roof with a pressure washer, or

2. Your time is better spent on other tasks and a professional would get the job done in a more efficient manner

 

It isn’t always about the money outright, but a combination of the money and the opportunity cost of doing things yourself.  Not to mention the health risks posed by trying to use power tools you have never touched before in your life or attempting to handle electrical work when you have trouble tying your shoes.

 

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Property Taxes

This one is iffy, which is why it’s down at the bottom.  Many times, especially if you aren’t putting down 20% the mortgage company will demand that you pay a portion of your annual property taxes each month as part of your monthly mortgage payment.  If that is the case, you are already aware of the costs because they will tell you when you are presented with your mortgage offer.  However, if you are not having your property taxes escrowed, you may be in for a shock come late October when most bills go out, unless you did your homework.  It’s relatively easy to research the property taxes in your desired area, but that just isn’t one of the things that most first-timers consider unless they are well prepared and taught to do so.  

 

Not everything is deductible

Now, one of the biggest reasons to own a home used to be the big tax deduction that would come with it, as mortgage interest, refinancing points, HELOC interest, certain mortgage insurance premiums, and real estate taxes are deductible  on your annual Form 1040.  However, those are the only expenses that are allowed as deductions.  Insurance, maintenance, association dues, pmi…none of these are available as deductions to home owners who occupy their homes. A kitchen or bathroom remodel is not deductible.  Even the so-called Energy Tax Credit may not be available to you if you do not have taxable income (although it can be carried forward).  

 

Buying a home can be a very confusing and overwhelming even for even the most organized and prepared person, let alone someone who has never gone through the process before.   Even if you have reliable people helping you out, it can still be a hectic process and one which you may want to just get over with.  The key is to arm yourself with the most knowledge possible and to take things one step at a time regardless of how slow it may feel like the process is going.  It is better to know exactly what you are getting into before hand, rather than make the purchase and then discover additional costs here and there as time passes.

 

Just remember, renting a home is still a very viable and responsible option as well. If you aren’t ready to be a homeowner, or you’re not sure that you can account for all of the costs involved in owning a home without stretching each paycheck to its limit, then don’t.  Buying a home when you are ill-prepared or not financially ready will certainly leave you “home rich and cash poor” or worse yet, completely broke.

  • http://www.moneybeagle.com/ Money Beagle

    One of the things you have to consider on the opposite side of it is the net worth difference. In renting, if you make a $1,500 payment, zero of that goes as an add to your net worth. If you make the same payment on a mortgage, it may at first glance appear the same, but in reality, the monthly amount you apply toward your principle stays with you. It’s just a net worth transfer from cash -> home equity. This assumes the value stays the same during that month. Obviously, if the value falls then you have to subtract that, but if the value of your home increases (which many are seeing), you actually get the principle you paid as well as the net increase added to your net worth.

  • http://twitter.com/bitfs BFS

    In our area, you can buy a great home and cover all of the extra costs for the same or less than a rental payment. The rule of thumb around here is that you will be paying all of the costs of home ownership one way or another – landlords are going to make sure that they are covering all of their costs, right?

  • http://www.narrowbridge.net Eric

    Insurance and taxes were the monthly payments that took some getting used to. I knew what the mortage and HOA would be, but adjusting to the extra $100+ per month was more surprising.

  • mbhunter

    HOAs are evil squared. So incredibly glad we don’t have one of those. The lack of an HOA was a big selling point for us when we bought our new house.