The True Cost Of Home Ownership

Buying a home is one of the greatest milestones people can achieve in their lifetime. It’s seen as a pivotal moment, “You’ve made it.” A home all to yourself, to live in, raises a family and grows old in. No more rent, noisy downstairs neighbors or aging appliances you can’t fix.

My wife and I are currently in the market for a home of our own. We want something we can grow in, run our business and ultimately be happy together. Our current apartment suddenly seems too small to fit after looking at such spacious homes. It’s a long process to find our dream home, but something we’re very excited to find.

The excitement of buying your first home, or even your 10^th home. Something new and full of opportunities can be exhilarating and have you up at night planning the design of each room.

With your shiny object syndrome aside, the cost of the house is an obvious expense, however there are many more costs involved with homeownership, starting with the day you sign those papers.

Down Payment

This is one of the more obvious expenses with buying a home. The recommended amount for a down payment is 20% of the purchase price. However, if you can’t afford the full 20%, there are options to put less down. There are different types of loans that allow for smaller chunks required up front, such as a FHA Loan. 15% or even 10% down payments can be made on your house, but remember, the less money you put down, the more your monthly mortgage payments will be.

I recommend putting down as much as you can, but leaving aside enough to cover closing costs and other expenses related to the house purchase. The more money you put down, the better in the long run.

Also, please don’t suck your savings accounts dry. This includes your emergency fund and retirement accounts. You’ll thank yourself later for not touching those accounts.

Closing Costs

Remember I just said to leave some money aside when putting together a down payment? Well the reason is for closing costs. These are lender and third-party fees paid at the close of your real estate transaction. All the lawyers involved, paperwork put together and anything in between is covered by these costs.

You can expect to pay anywhere from 3-5% of your loan amount on closing costs. Loan officers should provide estimates for you when shopping for your home, but there is room to negotiate some of the costs, but don’t be too optimistic.

There may be options to include this in with your monthly mortgage payments, but that will also increase the amount due month after month. Just food for thought.

Mortgage payments

So you have the house, you’re doing cartwheels on your new wooden floors. Now what? You need to prepare for your monthly mortgage payments! There should be no surprise with the amount you’re paying. Everything should be open to you while signing the papers for your home.

If you are still looking for houses, there are free mortgage calculators available online to give you a better idea of payments expected. Keep in mind they don’t normally include any other expenses included with it.

Property taxes

Once or twice a year Uncle Sam will come strolling down your block ready to collect. You may have been renting up to this point and have never experienced property taxes. As of 2019, the national average property tax was estimated to be $3,498. Your real estate agent will be able to give you a better estimate depending on your location.

This cost can fluctuate year after year, depending on municipal projects or increased home-assessed value. It’s not a stable cost, so be prepared for minor shifts in tax amounts each year.

Homeowner’s and Hazard Insurance

Hazard Insurance can be life saving, as it covers risk factors such as floods and earthquakes. Any natural disaster can help protect you from losing your home. If it catches on fire, homeowner’s insurance can help you afford the repair costs and keep you from losing everything. In 2016, it was estimated to cost almost $1,400.

These types of insurance can vary state to state, but they can be built into your mortgage payment if that’s something of interest.

Mortgage Insurance

If you made a down payment that was less than 20% of the loan amount, you will have to pay mortgage insurance, which can be up to 2% of the loan amount per year. This protects the mortgage lenders in case you fail to meet your monthly payments.

Normally 20% equity in your home is enough collateral for lenders to back you without any insurance, otherwise they need some reassurance.

There can be lump sums paid up front as well as premiums due each month until the remaining balance on your mortgage dips below 80%. Your lender may cancel the insurance charges at that time. Though it’s best to anticipate paying it each month until then.

If you received an FHA loan with as little as 3.5% down, mortgage insurance is likely to last the lifetime of your mortgage. Just keep this in mind if you wish to pursue this type of loan option.

Home maintenance

The beauty of owning your own home is that it is your own. It is your castle and your fortress of solitude. The place where you can grow and start a family if you wish. You are the King or Queen of this domain. However, to keep your castle in top shape, you need to consider home maintenance.

Expect the unexpected. Home appliances tend to break at the most inconvenient times. Heating systems seem to fail only when you need them the most. Even plumbing is guaranteed to fail when you need it the most. Your home is where you reign supreme, however you need to maintain it so you can live there longer.

Expect to pay 1% to 2% of your home value each year on maintenance and upkeep. I recommend putting money aside each month for these unexpected expenses to save you lots of grief when something goes wrong.

It sounds like a lot of money, but you’d be surprised one year is perfect then the next, everything breaks. So it’s best to be prepared for the worse. Getting a home warranty may be a great investment if you’re worried about the costs. Paying a monthly deductible for this can cover most repairs and maintenance.

Homeowner’s Association Fees (HOA)

 If you chose to live in a condominium, you can avoid many of the expenses I mentioned earlier in this post. Those in charge of the condo developments will likely cover any types of insurance or home maintenance. However, since they do cover you in those areas, it’s expected you to pay homeowner’s association fees, or HOAs. It’s a small minimal amount each month, but the perks you get in return may very well be worth it. Access to gyms, pools and other accommodations can be provided to you within the HOA fees.

Housing communities may also require HOA fees, especially within gated communities. They may offer gym memberships and community pools included with the fees paid. You pay a small amount each month, but the security and seclusion they provide may be worth it to you.

Average Cost of Utilities

You’re preparing to pay the mortgage each month, but don’t forget about all the utilities. If you were a renter before, you may be used to seeing gas and electric bills. So with homeownership, expect to pay for gas, electric, water and cable among other things. Your realtor should be able to provide estimates for the area of your home. Keep in mind these utilities can fluctuate each month based on the usage and the season.

Average costs of furniture and appliances

You finally purchased this whole house. But it’s empty. Time to fill it up with some furniture, appliances like washer and dryer and anything in between. This is where you can waste a lot of money of things you don’t need or the quality is not up to par and will need replacement in a few years.

You should budget out what you expect to pay after doing your research and come up with a plan of attack for exactly what you need. There are many “rules of thumb” when estimating how much furnishing your home can be, but I would say expect to pay 20% to 25% of the cost of your home. That sounds like a lot, but you’d be surprised how much everything adds up at the end.

True Cost of Owning a Home

Okay, that was a lot. I hope I didn’t scare you off with all the costs involved with homeownership. I scared myself a little bit. But don’t worry. Coming up with a plan for how much to save for a house can now include these costs now that you’re aware of them. Being well informed about all the costs can avoid any expensive surprises and help you live comfortably in your new sanctuary.