6. Forgotten Costs of Owning a Home

Costs of owning a home

Forgotten Costs of Owning a Home

The real estate market is CRAZY HOT right now. Historically low-interest rates have put homeownership within reach for more people than ever before. Low-interest rates allow individuals to dream of owning a larger home than they may have thought possible. Other than the purchase price of the home you choose, your mortgage interest rate is the single most influential factor driving how much you’ll pay each month on your mortgage.

Before you race to take advantage of the unprecedented low-interest rates, take a step back and consider all the costs of owning a home. There are many expenses to take into account when figuring your home buying budget. Many first-time homebuyers overlook these costs, which are typically not affected by changes in the credit market. So we’ve put together a list of some of the larger expenses you may be missing in your budget calculations.   

Private Mortgage Insurance

Mortgage lenders often advertise low-money-down loans to attract customers. Depending on your credit-worthiness, you may be able to purchase a home without a large down payment. But unless you have secured a VA or USDA loan—which are both smart options to explore if you and your property qualify—that low-money-down loan is likely to come at a cost. Private lenders typically require you to carry Private Mortgage Insurance (PMI) for the entire length of time that you have less than 20% equity in your home.

Estimating the costs of PMI

The amount you pay for PMI is determined by your:

  • PMI interest rate (typically somewhere between .55% and 2.25%)
  • Amount borrowed to buy the home
  • Value of the home

Due to these variables, we can’t estimate how much PMI will add to your monthly expenses. However, finding out is critical when creating a monthly budget. Your mortgage lender should be able to provide you a quote if PMI is required. This amount is typically added to your mortgage payment each month unless you decide to pay the lump sum at closing.

Maintaining the Home and its Value

Paint peels. Furnaces fail. Leaky roofs happen. Here’s an example that hits close to home (pun intended). In November 2018 our water heater leaked flooding part of our finished basement causing over $10,000 in damage! The water heater was only five years old and still under warranty. Unexpected events like this will happen, it is just a matter of when.

Depending on the age and condition of the home you buy, you should expect to save for, and eventually spend, a significant sum on home maintenance each year. Taking care of repairs in a timely manner not only keeps your home safe but also maintains its value. Over time, as you pay down your mortgage and build equity, your home may become your largest asset. Without a doubt, that’s something worth protecting. If your home falls into disrepair and you need to sell, you may end up having to sell to a cash home buyer.

Estimating Home Maintenance Costs

When estimating how much to save for home maintenance, 1-3% of your home’s value is where most homeowners land. If your home is less than five years old 1% of the value of the home is sensible. For older homes, 3% is reasonable. However, for most homeowners saving 2% of the house’s value for maintenance is a good rule of thumb. This doesn’t mean you will spend all of the budgeted amounts each year. However, big items like a roof or furnace must be replaced eventually. When these large expenses occur it is best to have cash reserves available rather than taking on additional debt.

house fire

Homeowner’s Insurance

Homeowner’s insurance generally falls into two categories: property damage and liability. Property damage insurance protects your home investment in the case of unexpected events like fire or natural disasters. Going back to my example above, when our water heater unexpectedly failed and flooded part of our finished basement we utilized our homeowner’s insurance policy. While we had to pay our $2,500 deductible the insurance company, West Bend Insurance, paid the remaining $8,000 to the restoration company. Homeowner’s insurance also provides coverage for your belongings, such as in the event of a burglary. Liability insurance, on the other hand, protects people who may be injured while visiting your property.

When you borrow to buy a home, mortgage lenders will require you to purchase homeowner’s insurance that’s sufficient to cover the amount of your loan, and sometimes the replacement cost of the house. While lenders mandate homeowner’s insurance to protect themselves, the best homeowner’s insurance policy will also protect your financial interests.

When purchasing a homeowner’s policy, it’s important to pay close attention to the coverage limits you select. Your mortgage lender may only require you to purchase the minimum coverage required to protect its own investment in your home. However, it’s wise to elect coverage that pays for the cost to rebuild your home if it is a total loss.

With every dollar you pay against the principal of your mortgage, the need for robust liability coverage increases. An accident on your property could make you liable for thousands or even millions of dollars (look into umbrella insurance for further liability protection and coverage). Taking a more altruistic view, your homeowner’s policy ensures that a visitor who is injured on your property will be compensated for medical and other costs arising from the accident. And that visitor might be someone you love very much.

Estimating Home Owner’s Insurance

Compared to other states, Wisconsin has fairly low homeowner’s insurance rates. The average annual cost of a homeowner’s insurance policy in the state of Wisconsin is just over $800.  Your premiums will vary depending on such factors like your home’s location, its value in today’s market, and the type and amount of coverage you select. Higher deductible policies can save you money. You can find various insurance rate estimators online without committing to a policy and it makes sense to compare several companies’ rates side by side.  Just be sure to use the same parameters for each estimate.

Real Estate Taxes

Real estate taxes are a given, no matter where in the US you live. Communities depend on real estate taxes to fund indispensable services, from education to police and fire protection. If you love your neighborhood playground and public library, you can thank real estate taxes for those, too. Real estate taxes are based largely on the appraised value of your home. Factors that influence appraised value include the address and size of your home and certain home features. More bathrooms, for example, can mean a higher appraised value and higher taxes. Houses that are located on corner lots appraise higher than similar homes in the neighborhood.

Estimating Real Estate Taxes

Unlike the other expenses we have mentioned, the real estate tax on any home is relatively easy to estimate, by looking at previous tax records. These can be found on the county land records website or even on real estate websites like Zillow. But bear in mind that the government periodically re-evaluates a home’s appraised value and your tax rate may go up or down each year. By the same token, property tax rates are subject to change. Real estate tax is often collected in monthly increments by your lender (who in turn pays the government) along with your other mortgage expenses. The same may be true of your homeowner’s insurance premium.

In conclusion, when you are running your numbers to understand how much home you can afford be sure to factor in costs to maintain the home, homeowner’s insurance, real estate taxes, and potentially private mortgage insurance. Adding these expenses to your projected mortgage payment will provide the true picture of the costs of owning your first or next home.

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