Hidden Costs of Owning a Home
Single Guy Money wrote an excellent article, titled “The Real Cost of Homeownership.” Anyone who’s on the market for a new home, please read his article. Go ahead, read it, I’ll wait…
*twiddling my thumbs*
Did you read it? Ok, good.
I’ve had a similar post in draft for weeks, but too lazy to finish. Now I can delete it. I’m done.
Just kidding. LOL
Since his article assumes a very responsible borrower (20% down, 30 yr fixed), I’d like to add just a few more things to his list. As evident by the current housing market, when one doesn’t put 20% down or lock in a 30 year fixed rate, it presents even more risks that should be considered. In addition to the mortgage payment (and expenses already outlined by SGM), other potential costs to expect are:
- Direct Expenses
- Adjustment Rate Mortgage (ARM) adjustments - your mortgage can quickly go from affordable to UNaffordable. Jonathan from My Money Blog wrote an excellent article to help you choose between a fixed or adjustable rate mortgage.
- Private Mortgage Insurance (PMI) - this is an extra expenses when you don’t have a 20% down payment. Unless you choose a blended mortgage (80/20, 80/10, 80/5, etc.), this is an expense you will pay until your equity is 20% of your home’s value. By the way, mortgage interest is tax deductible, but PMI is not. [Ed. Note: see comments]
- County Taxes - you own property, you pay taxes. The higher the value of your property, the higher the taxes. So even with a fixed rate mortgage, the escrow part of your monthly payment can still increase.
- Homeowner’s Insurance - you have to protect your asset. This value can also change, so the same applies, increased escrow can increase your monthly payment.
- HOA Fees - depending on the community and type of home (condo, TH, SFH), this can cost several hundred dollars per month. Some communities in the NoVA area have HOA fees upward $800/month.
- Decorating
- Furniture - moving from a small apartment, there will be plenty of empty space.
- Painting - who wants to look at stark white walls?
- Design preferences - the moment you’ve been waiting for, it’s FINALLY yours, so I know you’ll want to personalize it. Have you seen the price of real mini blinds and window treatments? *faint*
- Indirect Expenses:
- Neighbors - move to a neighborhood with wacky neighbors and watch how much it costs you (i.e. security system, privacy fence, etc).
- Schools - if the school system is poor, consider the effects it may have on your children. Otherwise, you’ll end up wanting to move or paying for private school. If you don’t have children, a neighborhood with a poor school system usually has less than desirable surroundings.
- Immobility - when you own a home, you can’t just pack up and move whenever the mood strikes you.
- Market fluctuations - If you plan to stay in your home for many years, this may not affect you. But if you plan to move in a few years, you may find yourself with negative equity (owe more than the house is worth) or unable to sell at all.
As I’ve stated several times on this blog, owning a home is MUCH MORE than making a mortgage payment every month. When I purchased my first home in 2006, I made several costly mistakes that could have been avoided. If I could do it all over again, I’d tell my younger myself to have at least 3-6 months in cash reserve (after closing) and plan to stay put for at least 5 years. Otherwise, owning a home would not have been on my wish list of things to do.
If you are a homeowner, is there anything else you would add?
~*~*~*~*~*~Work to achieve, not to acquire.
And as always, BE FABULOUS!
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Thanks, I needed to read this one. And that “neighbors” part bothers me.. I got a quick temper… Sigh! i wonder if I can move somewhere with only elderly.. Least I know they’ll be quiet AND nosey enough to watch my place.
Starting 2007 PMI is tax deductible
@ Akhil - I thought I remembered hearing/reading about the change but wasn’t sure because I couldn’t find a source stating it was TD. Do you have one? I guess I could browse the IRS website to find it. Thanks!
I have to live in an Homeowners Association, while perhaps it may be nice if they did something they don’t, in fact they just make us miserable.
Jessica
Thanks for the mention SingleMa! Glad you enjoyed the post.
Painting - who wants to look at stark white walls? I do. I do
LOL
I think most people want a house simply because it’s something they don’t have. Once they get one, they want to move again to something else.
All I can say is that ..”you will never have your dream home”, I know people that had custom made homes and still after it was over and done, they wanted to change something else.
My only weakness is change, my lifestyle tends to upgrade every 5 years or so. I have to learn how to accept/appreciate stuff.
–Wanted to add that as of 2007, PMI is 100% tax deductible as part of your Mortgage Interest.
Already noted by the 2nd commenter but thanks. If anyone is interested, read more about PMI tax treatment on IRS publication 936. Despite being tax deductible, there is still no upside to paying PMI, in my opinion. It does not reduce the principal of your loan nor does it add value to your equity. It’s just another profit source for the lender. [-SM]
http://www.irs.gov/formspubs/article/0,,id=177977,00.html
Mortgage Insurance Premiums Treated as Home Mortgage Interest
You may be able to treat mortgage insurance premiums you paid during 2007 as home mortgage interest. The mortgage insurance must be paid in connection with home acquisition debt, the mortgage insurance contract must have been issued after 2006, and you must have paid the premiums before 2008 for coverage in effect during 2007. You can deduct mortgage insurance premiums on Schedule A (Form 1040), line 13.
Limit on deduction. If your 2007 adjusted gross income on Form 1040, line 38 is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated.
I think this is a good list. The one thing I’d say is the decorating doesn’t HAVE to be done right away. When my mom and I moved into a town house from an apartment she took her time buying furniture. I think we went 6 months without furniture in the main living room (old stuff was in the basement family room) and I though it was the best thing in the world. There were picnics and sleepovers that I thought were much more fun than furniture.
We’re at the very beginning of the home buying process (getting our lives in order, talking to a broker about pre-qualifying, etc) and the first two rules I’ve laid out are:
1) No offers until the emergency fund is at three months.
2) We move with the furniture we have and make due until we can afford more.
Pam- thanks for the PMI info. That’s a really great thing to know as we move forward.
Hmm, the one thing I would add is…especially if you are buying a renovated home is to ask the seller to disclose all of the contractors who performed the renovations, the dates that the renovations were completed and if there are any warranties or guarantees on the work. There is nothing more painful then realizing that the renovation work that “looked” spectacular…is an actual mess.
This provides good information because then you can determine if the work was done with permits…and if it was done up to code. A major challenge, especially in the DMV area is that a lot of renovation work was done without permits…and was not done up to code. There are things that even the best-home inspector will miss. So if you have the information, and you have an issue, you can call the contractor who did the work because they will have the best knowledge of the project. Of course, if the contractor won’t return your calls…
I second the advice to wait before decorating/buying furniture, if you can. Particularly if you’re coming from an apartment and don’t have a lot of stuff, I’d make do with your crappy old futon bed and your handmedown sofa for awhile. Live in the house for a few months — see what you actually do, and which rooms you find yourself drifting toward. That back room you thought you’d use for an office may turn out to get a lot of light and be a great living room instead. Or the living room where you thought you’d need a formal sectional may turn out to just “feel” better with less stuff in it. Are you sure you’re always going to put the TV there? Really sure?
Thanks for your input and I agree that one should wait until they get a feel for their new home before spending money on furniture. However, the purpose of this post is not about WHEN or HOW to furnish your home. The point is, you WILL do so eventually, hence, an extra expense incurred that’s often overlooked when owning a home. [-SM]
If I could start all over again I would have set aside between $100 and $200 every month for home repairs into a savings account.
Other costs not related to actually buying, but will cost you while you own the house are heating/cooling costs, water bills and electricity - our electricity bills were HUGE the first year we moved in, as we ran electric heaters (no air con installed, and i don’t want to install it now anyway), and with an open plan house it was really expensive - we’ve since insulated the ceiling, and it has made a significant difference to the temperature. (we’re in summer at the moment - so not sure what saving winter will bring)
The other cost that went up was our water bills, watering the garden can cost a fair amount of money too!
Always check for termites/white ants - here in sydney, if you don’t catch them early they’ll cost you your house, literally!
Great post. I do have one hidden cost that most people overlook…your time. For most of us, time is our most valued resource. People need to keep in mind how much will be spent with ownership vs. renting.
There is a great deal of satisfaction that comes with home ownership, but it comes at a cost. You spend a ton of time on maintenance and improvement. Even if you have someone else do the work it still takes time to supervise and arrange the labor. Your time for paying bills goes up. You need to spend more time on insurance. What about disputing the value that your local taxing authority has you appraised at?
I keep an hourly rate for my time in my head. That way I can “monetize” my labor cost. Depending on your profession, that could be anywhere from $5/hr to $250/hr.