The True Cost of Home Ownership
Posted by jefferson on Jun 22, 2012 in Saving Money | 41 comments
They say that home ownership is the American Dream. That every one deserves to have a place of their own, where they can raise their family and be their own landlord. Even in a down economy, I am inclined to agree. Owning a home is one of the best investments you can make, because you build up equity without even trying. If you spend ten years paying rent on a home or apartment, you really have nothing to show for it except for a long list of debits. But instead, spending those same ten years paying towards a mortgage and you will already own a large stake in the home’s total value. I love being a homeowner, and look forward to the day when we own this home, and the land that it sits on, outright.
By far, the largest expense in home ownership is the mortgage. The general rule is that you shouldn’t have more than 28% of your gross monthly income tied up in your house payment, which is a hefty amount none the less. Since very few have hundreds of thousands of dollars laying around to purchase a home with cash, chances are good that you will need to obtain a loan through one or more Private Mortgage Insurance is a necessity when you take out a loan and don’t have 20% equity in the home that you are purchasing. PMI’s basic role is to offer the lender protection in the event that the borrower defaults early in the life of the loan. From a borrower standpoint, PMI certainly feels like a raw deal (I could have easily included it in my money for nothing article that was posted recently). It is a monthly payment, just like your mortgage, but one that doesn’t build any equity. When we purchased our home, we chose to dance around PMI by getting an 80/15 loan , where we borrowed 15% of the purchase price with a secondary loan to bring our “equity” up to the required level. After a few years, we refinanced the two loans into one, at the low rate that we enjoy today.
Insurance and Property Taxes
Each month, your lender will automatically deduct these two payments at the same time your mortgage payment, and drop them into what is called an escrow account. On our home, we pay an extra $300/month into our escrow account, with $200 going to property taxes, and $100 for homeowners insurance. Much like utility costs, property taxes can vary wildly depending on where you live, and they go a long way to pay for local schools, parks, and roads. We recently had a large increase in our property taxes to help pay for a major budget shortage in our local public school district, but as a family with kids in the public school system– we really couldn’t complain.
Association Fees
A lot of neighborhoods require an additional fee for amenities such as pools, tennis courts, clubhouse access, and maintenance to outdoor lighting and common grounds. If you live in a condo or villa (or your neighborhood has a golf course), this expense can also cover roofing, lawn care, homeowners’ insurance, and snow and leaf removal. When home shopping, you should always find out if there is an association fee, and factor that into your cost estimates. When we lived in a condo prior to buying our current house, we had association fees that were $80/mo, which added up to $960/yr! It felt like such a rip-off since the complex didn’t even have a pool, a common ground area, clubhouse, tennis courts, or anything fun. Our current subdivision has an association fee that is just a fraction of that and has all of those amenities and more. For a while when I was living at the condo, I was actually convinced that my monthly $80 check was going toward the “treasurer’s” smoking funds.
Maintenance and Repairs
As a homeowner, you are obligated to keep your property in good condition. You don’t want to be that one guy with the overgrown bushes and broken-down appliances on the front lawn. No one wants to be that guy. Staying in your appropriate price range, will ensure you will be able to afford repairs as they pop up… and they will always pop up. When we bought our house, it was nearing that 25-year-old milestone when appliances start to need replacement. Sure enough, we have had to replace the furnace, a/c, water heater, and more since moving in. If you budget for it, or even if you have a proper emergency fund, you will be ready for these emergencies, but you shouldn’t be surprised when things do eventually break down.
You also should take pride in your home, and try not to let it get too dated. If you ever plan on selling, you should probably get rid of any formica (you probably don’t even know what that is if you’re early 20′s and live in a newer place.), linoleum, outdated cabinets, fluorescent light boxes, popcorn ceilings, etc. Making home improvements can be a costly matter, so you will need to save and plan for ahead for them. If you have any questions about updating your house, don’t be afraid to ask your local real estate agent, who will generally be happy to let you know which projects will give you a good return on investment.
As for the exterior of your home, regularly mowing your lawn and pulling weeds is an absolute must. This will keep the neighbors happy as the value of their properties are improved by having well-kept homes around them. If you can, drop some fertilizer once or twice a year to keep your grass green and happy, and try to keep your bushes and trees trimmed and looking nice. Keeping your exterior looking good is more of an investment in time than money, but an investment none the less.
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I always thought PMI is a raw deal. However, I’ve since learned that in many states, banks have recourse in pursuing foreclosures where the sale of the home didn’t cover the balance owed. If you have PMI, you are protected. So, I’ve come to learn the PMI does have a use for the homeowner. Unfortunately, you have to go through foreclosure to get the benefit.
JP @ My Family Finances recently posted..Does It Cost More to Cook on the Oven or the Grill in the Summertime?
With all of the trouble that banks have had recently, I would imagine that they are quite a stickler about PMI and the potential ways to skirt around it these days. No banks want to take a wash.
I think a lot of people don’t realize all the costs that are associated with it. My friend who is looking for a house said her whole mortgage payment is less that $700. I asked if she was sure it included everything and she said yes but had an unsure tone like she wasn’t sure what I was asking!
Michelle recently posted..Dollars and Cents
I would imagine that their mortgage payment will be far above and beyond that when it is all added up.
In Canada, we call association fees “strata fees”, and the boyfriend refuses to buy a home for which we have to pay strata. He thinks it’s a waste of money – which really, it is – but non strata homes are more expensive. So we won’t be saving on costs, I guess!
Daisy recently posted..How to Step Up to Change – Coping Mechanisms For Those Who Are Resistant
I don’t mind paying association/strata, as long as you get something for your money. We get a pool, tennis courts, common ground, and more… It is more than worth it for what we pay each year..
I have to agree with jefferson here. My wife and I bought a brand new house back in 2005(first ouch). It looked beautiful and had nothing but problems. In the end we lost 120k in equity and wound up paying about 16k in repairs before we sold it last year. Not to mention the countless hours taking care of the yard which takes away from time with the kids. We moved to a condo with association fees and now we have all the yard work taken care of. My weekends are mine again! Thanks for reading.
We have been fortunate on this front, Adam.. As we haven’t taken a completely wash on a home yet .. I know when the bubble burst it hit lots of folks really hard.. but I think the worst behind us at this point, and those venturing into home ownership for the first time, should be in good shape.
Glad you hit on maintenance and repairs. I think so many people don’t factor in that things go wrong and they need to be fixed. If it’s something major this can be a big expense so you need to be prepared.
Sean @ One Smart Dollar recently posted..3 Best 0% Balance Transfer Credit Cards
Maintenance costs can be the most frustrating because they are the most unpredictable!
I don’t mind association fees. It beats having to handle those repairs and maintenance myself. It takes some of the stress out of being a home owner. I really want to be a home owner soon, but unfortunately it’s looking like I’ll have to move to a different city to make that a reality.
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The only maintenance that you typically get from association fees is to the external part of your home (and only if it is a shared building, like a condo), or to the common grounds. You are typically still on the hook for repairs on the inside of your home.
We were just having a conversation on my Facebook page about this last night. Many people think well I’m paying x amount for rent I might as well own a home. They tend to forget about property tax and home maintenance. These 2 costs alone can add up and if you don’t have the money in your budget you can be up the creek without a paddle.
Our friends have a home where they pay $66 a month in condo maintenance fees although their home is detached. These fees are for the association to keep the flowers and shrubs pretty. This is supposed to help keep the value on the homes up. I’m not sure pretty flowers can help anyone who hasn’t budgeted enough money to maintain their own home let alone the flowers.
Great post, lots for people to think about. Budget the money and make sure you know everything you will be paying for before you jump in.
Mr.CBB
Canadianbudgetbinder recently posted..Understanding Mortgage Insurances
I still recommend home ownership, even with all of the feeds added in. Our largest investment right now is our home, as we have tens of thousands of dollars in equity already there. If times ever got too hard for us, we could certainly sell and look to downgrade.
Great post! The points you make are good ones that people should know about before buying a home. Especially PMI, I hated paying that. There are ways around it, like how you did it, and if you are a veteran (U.S) you are eligible for a VA loan which doesn’t require PMI (although you pay a little higher closing costs). Luckily where I live there isn’t an association fee. I’m pretty sure I wouldn’t have bought if there was.
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I didn’t know that VA loans didn’t have to pay PMI, but that is a great service for veterans. We have never had to pay it thankfully and I couldn’t see us ever purchasing another home (and leaving our current) unless we had 20% down.
At this point, I would rather just fix up our home.
This really does cover all of the costs associated with home ownership. First-time home buyers often fall into a trap of not fully understanding all of these expenses though. It’s so common for people to ONLY look at the payment on the mortgage but when you throw in a FEW HUNDRED extra dollars for PMI, Insurance, and Property Taxes then you realize you might not be able to afford as much as you originally thought.
Jason recently posted..Carnivals, Mentions, & Weekend Reading #17
I have seen this happen as well.. The numbers that you hear from your lender are in no way complete.
I currently own my home and have a very cheap mortgage because of low interest rates. The thing is even with this low monthly payment, which could easily change in future, the costs of maintenance still add up. There’s a job that needs to be done on the place within the next year or two which will cost around 4 grand!
That would pay my current mortgage for about 2 years! So the cost of maintenance should be given as much consideration as the cost of the mortgage itself when deciding whether to buy a home.
Money Bulldog recently posted..To Rent or Buy A Home? The Argument for renting!
Yes.. I know the feeling. There is seemingly *always* a list of repairs that need to be made “when we get the money”. We are very slowly, but surely, working through that list– but of course, new things are always being added onto the end.
Great post! We have been condo shopping for over a year now, and all of these things are absolutely important to calculate with your estimated monthly payment. Everything adds up quickly! Luckily we avoided PMI since we have over 20% down saved, but the cost of repairs is always a headache to think about… we went and got estimates of repairs and sometimes there is something that requires tens of thousands of dollars to repair, like under the foundation or mold in the wall connected to another person’s condo. We’re taking a break right now… we might just save up more money for a larger down payment for a newer place.
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Our first place was a condo, and I think that is a great way to get started Erika. Be careful of association fees, however, as they can get quite high with some condos.
I think one of the biggest misconception about home ownership in America is the word “homeowner”. Unless your home is paid off in full you do NOT own the house but the bank does. Do you want proof? Please take a look at your amortization schedule!
I recently wrote two articles about this topic. It may give another perspective.
1) Is It Better to Buy or Rent?
2) How to calculate impact of irregular extra payments to your mortgage balance?
Early Financial Freedom recently posted..Stages of Financial Planning for Early Retirement Seekers
This is true, but that doesn’t make anything that I said invalid.
Having a mortgage on a home is certainly not like layaway.. You get to have a roof over your head right away.
It is you, and not Joe Banker, who gets to play ball in the backyard or paint the bedroom.
Jefferson, I totally agree with what you wrote, and my point was not to invalidate it. I am sure you heard about “homeowners” who put 0% down with interest-only loans.
Early Financial Freedom recently posted..Stages of Financial Planning for Early Retirement Seekers
I know EFF… We are on the same page.. Those zero percent down loans are nasty business..
This is an excellent breakdown of costs for new homeowners. You’re right, investing in a home is almost always a good investment. Especially if you own more than one, you can rent out the other and have your mortgage paid for you.
I hate HOA fees. But that’s mostly because I hate HOAs. At my last place, my roommate’s lab had to be kept indoors unless supervised because the HOA wouldn’t allow a fence tall enough to keep the dog from jumping over it.
Our HOA has a bunch of rules too, but I don’t have a huge issue with most of them.. They don’t let people in the neighborhood install large above-ground pools, for example… But the neighborhood has a great pool that is actually paid for with HOA fees, so there should be no reason for it.. Unless you insist on swimming nude or something.
In my area owning and renting are about the same price so buying a house definitely feels like the way to go. The home repairs and updates aren’t always a bad thing. I enjoy fixing up our house. We just do one little project at a time to keep the costs down. We haven’t had to do any costly repairs yet. (Fingers Crossed)
I am not a big DIY guy, by any means.. But it does feel great to fix up your home and make it your own.. We completely redid our kitchen a couple of years ago, and I can only imagine what the previous homeowners would think if they saw it today..
Yep, all of those things (plus some added utility expenses in some cases) can add up significantly. People always say that it is more than you think, and they are not kidding in most cases. Still, I love your 10 years of paying rent example. At the end of the day, you can lose a lot by renting long-term too.
Roshawn @ Watson Inc recently posted..Stolen Life
I rented throughout college and when I first started work.. I can only wonder how much equity I would have today if I would have purchased a place, even a small one, from day one..
Great tips, Jefferson. I like your “you don’t want to be that guy” analogy. In fact, I generally want to be “that guy” on the other end of the spectrum…the one they’re trying to keep up with!
AverageJoe recently posted..One More Week!
Nice.. I just don’t have time to be completely on the other end of the spectrum and have one of the nicest yards on the block… I shoot for the middle road.
Some states offer a great way to save on taxes – a Homestead Exemption. You can save thousands per year depending on your home value and county tax rate.
That sounds like something I should know more about.. Homework time! Thanks for the tip..
PMI only insures the first 20% of the loan NOT the entire mortgage loan amount. I am in favor of PMI’s, Though I have heard some horror stories but honestly it gives limited protection to a homeowner’s lender if a loan goes into default and foreclosure.
I sure wish that I had read an article like this 18 years ago when I bought my first house. I qualified for a good amount, but thought the principle payment was all I had to worry about. Suffice to say that by the time everything was added in, it was close to double.
I hope that this article finds it’s way to a new home buyer BEFORE they buy. Thank you for sharing the info.
Hey.. Thanks for the nice comments.. I too wish that I had this information back when I bought by first place. My “cheap” condo payment ended up to be note so cheap with all of the additional costs factored in..
Great article! On the topic of Homeowner’s dues, it’s important to also check for the possibility of “special assessments”. A friend of mine bought a condo in a building that was not in great shape. Written in the HOA terms it stated that they could assess each homeowner up to $5,000 as many as 3 times each year. Well that is exactly what happened and my friend was not able to pay it so his condo was foreclosed. I am a lender and a huge advocate of home ownership but it is so important to understand that with the value of home equity and ownership comes added responsibilities.
Bill Clifford