The True Cost of Homeownership
By far, the top concern I’ve heard with homeownership are the hidden costs. If you read last week’s blog, How Much Home Can You Really Afford?, buckle up, we’re doing some more math this week! (Not as much this time.)
But first, what could the hidden costs be? From last week, we know that if you have an escrow account, your property taxes, homeowner’s insurance, and mortgage insurance are included in your monthly mortgage payment. If not, your mortgage lender will still account for these expenses in your pre-approval amount to determine affordability. It’s important to understand that these costs can increase, typically on an annual basis:
· Property taxes – annual property taxes can increase due to rising assessed home values or referendums that get passed during local elections.
· Homeowner’s Insurance – homeowner’s insurance rates can increase at your annual renewal time. You can shop coverage anytime, to make sure you’re getting the best rates & coverage possible. I recommend doing so at least annually.
· Homeowner’s Association (HOA) dues – if you live in a neighborhood with an HOA, your standard dues can increase. In addition, a special assessment could be charged. Special assessments typically cover the costs associated with adding, maintaining, or improving community amenities.
Separate from the above items and perhaps the most daunting are repairs and maintenance. The biggest (and only, in my opinion) convenience of renting is the fact that repairs are not your problem. I cannot dispute that. In fact, if I ever rent again, I will be calling maintenance everyday for something new just because the bill isn’t coming to me afterwards. So how much can you expect to spend per year on repairs and maintenance? There are two methods: one says to budget 1-2% of your home’s value each year and another says to budget $1-2 per square foot. Both are reasonable methods.
$2,500 - $5,000 per year on a $250,000 home
$2,500 - $5,000 on a 2,500 square foot home
Your mortgage lender isn’t going to require you to budget for those items, but it makes sense for you to do so. Keep in mind, this is just a guideline. Some years you may spend less, some years you may spend more. For example, if you have to replace your roof for $7,000, that obviously is over the above sample budget. But, that is an expense that you likely will not incur again for at least 20 years.
To avoid costly repairs, I encourage you to do annual preventative maintenance around your home. Proper maintenance will not only extend the life of your systems, but it will keep your annual repair costs on the low end of the above figures. Another way to keep your out of pocket costs manageable is to make repairs if you can avoid replacing an entire system. For example, a furnace is just a machine made of several small parts that keep it functioning. As long as your furnace is still being produced, that means the parts for that furnace are still in production. See if you can find the parts first, it could be the difference between a $100 repair and an $8,000 replacement.
Pro Tip: YouTube has a video for EVERYTHING. Whenever something breaks, I type what’s broken in the search bar and I’ve taken numerous repairs into my own hands that way. It's also helpful if I have to call in a professional, because I can identify the problem.
Another way to potentially reduce the out of pocket cost of repairs is to purchase a home warranty. Not to be confused with homeowner’s insurance that covers your property from various losses and destruction, home warranties often cover system failures that happen within the home like appliances and HVAC systems. There is typically a $50-100 deductible for each service call you place to the warranty company and a claim process to confirm whether the repair is covered.
If you are not a homeowner yet, keep these costs in mind as you budget for your purchase. Consider the age of the house and systems within as you browse for your first home. If you find an older home with a brand new roof, that’s an expense you likely will not incur while you own the property. If it’s a 10-15 year old home that has had nothing replaced, things like the water heater and appliances could be at the end of their lifespan. If you are currently a homeowner, how do you budget for the unexpected? Did you know to calculate for repairs and maintenance in addition to your monthly housing expenses?
· Assessed home value – the dollar value assigned to a property to measure applicable taxes.
· Market value – the amount for which something can be sold in a given market.