When it comes to owning a home, the initial down payment and mortgage payments are just the beginning. There are a number of expenses that you should consider before deciding to purchase your first home. Many of these expenses continue for as long as you own your home - even after the mortgage is paid off.
TUTORIAL: Mortgage Basics: Costs
1. Property Taxes
Property taxes are typically paid to your municipal or local government, county or state to fund such things as public works, wages of government workers or public school boards. Property taxes are an expense that homeowners can expect to pay for as long as they own their home. Taxes are assessed based on the current value of your home, and can change over time to reflect your home's increase or decrease in value. Property taxes can also vary depending upon the region, so you should always investigate the property taxes in the area you're looking to buy. In 2008, the national average for property taxes was $1,180 per annum. (Find out what steps you can take to reduce your bill, see Five Tricks For Lowering Your Property Tax.)
2. Home Maintenance
Homeowners can't simply call the landlord when the appliances need to be replaced or the hot water tank stops working. All these home maintenance tasks - and even the larger home renovations - are the responsibility of the homeowner. Whether you're planning a large remodeling project, or just to cover the necessary repairs, it is suggested that homeowners budget at least 1% of their home's purchase value per year towards maintenance. Therefore, if your home is worth $220,000, you should plan to set aside at least $2,200 towards maintenance costs. Some sources even suggest you should budget for up to 4% per year, which would be $8,800 on a $220,000 home.
3. Mortgage Interest
The amount you'll pay in mortgage interest over the duration of your mortgage depends upon the length of time you amortize your mortgage over (or the number of years that it will take you to repay your home loan), the frequency of payments and the rate of interest. The interest rate on your mortgage can fluctuate over time, depending upon the type of mortgage you select. However, for a general idea of how much interest a homeowner can expect to pay over the course of their mortgage, if you have a $220,000 mortgage that is amortized over 30 years at a rate of 5%, you can expect to pay roughly $205,162 in interest. (Besides creating ongoing income and capital appreciation, real estate provides deductions that can reduce the income tax on your profits, check out Tax Deductions For Rental Property Owners.)
4. Home Insurance
Renters may have to pay rental insurance, but homeowner insurance tends to be a lot more expensive. Rental insurance typically covers contents insurance; however, homeowners are concerned with the value of the physical structure of their property as well. If a home is lost in a fire or natural disaster, insurance will cover the remainder of their mortgage, or the cost to rebuild or repair the home. Insurance policies offer different levels of protection and coverage, and premiums can vary greatly. In 2008, the national average cost of home insurance was $791 per annum.
5. Real Estate and Legal Fees
The mere act of buying or selling a home comes with costs. The seller is generally faced with paying the real estate agent fees, which typically come in the form of commission. Commissions are negotiable, but tend to run about 6%. If you sell your home for $220,000, you can look at paying about $13,200 in commission. Also, both buyer and seller must pay legal fees to cover the transfer of title. Legal fees vary depending upon the lawyer. The national average for legal services is $284 per hour, according to Lawyers.com. Of course, the actual cost will depend on the requirements and the experience of the legal team. Real estate lawyers also charge for additional closing costs associated with the purchase or sale of your home, so you should always budget a bit extra. (Property transactions are complex and subject to specific state/local rules. A professional can simplify the process - check out Attention Home Buyers! Why You Need A Lawyer.)
6. Landscaping and Lawn Care
If your home has a yard, you will definitely need to budget for landscaping and lawn care costs. Paying a landscaping company to care for your lawn could run you about $30 per week. That adds up to between $120 and $150 per month for a basic lawn. If you choose to do the work yourself, your costs will undoubtedly be lower; however, you'll still need to consider expenses like fertilizer, tools and maintenance equipment, tree maintenance and seasonal plants for the garden. Although you might want to think it is free if you do it yourself, you do need to think about the time cost of mowing the lawn, or shoveling snow, if you are in the higher latitudes.
7. Home Owners' Association Fees
Some developments charge a Home Owners' Association (HOA) fee or condominium fee. These fees often cover external building maintenance and landscaping costs for common areas. This minimizes the cost of any home expenses that are covered by the HOA fee, though these fees won't cover any internal maintenance costs associated with your unit. HOA fees may not cover maintenance or construction projects if the HOA doesn't have enough money in reserve to cover it. This may result in a hefty cost to owners in the development. Those in HOAs should set some money aside to cover such unforeseen expenses associated with the maintenance of their communal property.
TUTORIAL: Budgeting Basics - Budget Bootcamp
The Bottom Line
Keep in mind that your landlord is paying all these expenses for the property that you're already living in. Therefore, all these expenses are being factored into your rent. Other fees could include an extra parking spot, or loss of percentage of the security deposit. Also, real estate values tend to increase over the long term, though the real estate market is definitely not immune to short-term fluctuations. If you can make a long-term commitment to owning a home, there is a definite potential to earn a profit from the sale of your property. Just keep in mind that there are more expenses involved with owning a home than immediately come to mind. Just because your mortgage payments are less than your rent doesn't necessarily mean that you'll come out ahead in the short term.
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