|
|
Although there are many ways to assess the impact of homeownership costs, one of the most intuitive approaches is to determine the homeowner's break-even rate. For the purposes of this article, the break-even rate will represent how much the purchase price of a new home will need to appreciate on an annual basis in order to cover the costs of owning the home. In this article, we'll show you how to use a practical methodology to assess the impact of your homeownership costs.Assumptions
To illustrate this methodology, the following homeowner assumptions are made:
- The homeowner is single.
- The homeowner is in the 28% federal income tax bracket.
- The homeowner purchases a new home for $225,000.
- The homeowner makes a 5% down payment and obtains a fixed rate loan at 6.25%.
- The homeowner will live in the home for seven years.
The homeowner assumptions used in the illustration play a critical role in the valuation process. Therefore, if a homeowner chooses to use this methodology, he or she must adjust these assumptions in order to reflect his or her unique circumstances and expenditures. In any event, if this methodology is followed and the proper adjustments are made, homeowners should be able to determine the rate at which their homes will need to appreciate each year in order to cover the costs of owning their homes.Costs of Homeownership
To begin this process, it is important to be aware of the primary expenditures that affect the value of a home. For the typical homeowner, these costs include:
- Home maintenance
- Natural disaster insurance
- Private mortgage insurance
- Brokerage fees
- Closing costs
- Property taxes
- Mortgage interest.
To determine how these costs affect the value of a home, we need to express each cost as a percentage of the home's purchase price. By evaluating the expenses in this manner, we can determine how much the home will need to appreciate each year in order to offset these expenditures. (To learn more, see Downsize Your Home To Downsize Expenses and Mortgages: How Much Can You Afford?) Let's take a look at the end result (in Figure 1 below) and then work our way through each expense one by one.
 |
| Source: Troy Adkins |
1. Home Maintenance Costs
Home maintenance expenditures include cash outlays for services such as appliance repair, pest control, house cleaning, chimney cleaning, gutter and downspout cleaning, landscaping, lawn maintenance and home security. (To save money on home expenses, see Fifteen Insurance Policies You Don't Need, Extended Warranties: Should You Take The Bait? and Five Money-Saving Shopping Tips.)
|
|
|
|
•