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

Yeah, I know there has been a lot of debate about real estate being a good investment, 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 the mortgage, and not everything will be a deduction when it comes time to file your taxes.

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.  Unfortunately, and this usually happens to younger, first time home buyers, what you don’t normally hear much about are the associated costs of owning a home:

Insurances

If you take on a mortgage, more likely than not, you will be forced to take out and insurance policy with certain coverages. Then, you have to obtain other insurances based upon your location (ie: flood or wind zones) that may require secondary policies if you main provider doesn’t offer such coverages.  Of course, it is also an integral part of financial planning to have your investments and other items insured in case of unforeseen events, but it is 

Home Owners or Condo Association Fees

Again, this depends upon where you live.  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 association also set guidelines for which residents have to abide by such as the colors that exteriors can be painted, parking rules,  and to “police” 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 do these things yourself, 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 and

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.

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 real estate taxes 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.  Its 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.

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, cetain 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 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).  Some people are even purchasing homes in other countries, such as Canada, just to avoid some of the associated costs of owning a home in the United States.  However, even other countries have tax implications that most homeowners know nothing of.  The only way to tell is to compare the numbers that your Canada tax software (or tax software from any country) churns up, with that of your current tax figures in the United States.  The results may even surprise you.  

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.

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