It is less costly to rent a home than to own one, thanks to numerous expenses associated with homeownership. Renters pay a monthly fee to live in someone else’s property, while homeowners pay a monthly mortgage to eventually own the property in which they live. But those mortgage payments are just the tip of the financial iceberg. That's on top of the down payment you need to secure your loan. There are also property taxes, as well as maintenance and other costs, many of which continue even after the mortgage is paid off.
In some situations, the lower cost of renting versus owning may make renting the better choice. But conventional wisdom says that owning your own home is better than renting from someone else. After all, a home is the single most expensive asset most people will ever possess. So if you are a renter who wants to become an owner, it's important to know the costs that homeowners have to cover and think through your decision carefully. Here is a detailed look at seven of those costs.
- Choosing to buy your home depends on your own personal circumstances, finances, and long-term goals. A home is the most expensive asset people may ever possess.
- Homeownership comes with a number of costs beyond the price of the home, including property taxes, mortgage interest, homeowners insurance, bills, legal fees, landscaping costs, and homeowner association fees.
- Homeowners are eventually rewarded for their monthly mortgage payments by owning the property where they live outright.
- Renters do not have to shoulder the burden of paying for the upkeep of the property in which they live.
1. Property Taxes
Property taxes are assessed based on the current value of your home and can change over time to reflect the increase or decrease in the value of your property. As a homeowner, you can expect to pay property taxes for as long as you own the property. This tax pays for local services, such as public works, government employee wages, and public school boards.
Property taxes can also vary depending on the property location, so you should always investigate what those taxes are in the area. In 2020, the national average for property taxes for a single-family home was $3,719 per year or 1.1% of the assessed value of a home. Certain metropolitan areas may assess higher taxes on property owners, including New York City and Chicago.
But do renters pay property taxes? Yes and no. Although the burden of property taxes falls on the homeowner, certain landlords factor this expense into the monthly rental amounts they charge tenants. Some may charge a little higher to pay building and property expenses while turning a profit.
2. Home Maintenance
Homeowners can’t simply call the landlord when the appliances need to be replaced or if the hot water tank stops working. The responsibility of home maintenance tasks, from buying a new microwave oven to replacing a roof, all falls on the homeowner.
The 1% rule is widely known in the real estate and insurance industry. It states that homeowners should budget at least 1% of their home’s purchase value per year toward maintenance. Therefore, if your home is worth $220,000, you should plan to set aside at least $2,200 toward maintenance costs.
Other methods include the square foot rule, which says to save $1 for every square foot of livable space every year. The 10% rule, on the other hand, dictates that homeowners should put aside 10% of their main monthly expenses, such as mortgage payment, property tax payment, and insurance payments, every month for maintenance.
3. Mortgage Interest
The amount owed in mortgage interest over the duration of your mortgage depends on the amortization period of your mortgage, the frequency of payments, and the rate and type of interest. A fixed-rate mortgage always has the same interest rate, while an adjustable-rate mortgage fluctuates over time. Each has its advantages and disadvantages.
So how much interest can a homeowner expect to pay over the course of their mortgage? Let’s say you have a $220,000 mortgage that is amortized over 30 years at a rate of 5%. In such circumstances, you can expect to pay roughly $205,162 in interest. This is nearly equal to the cost of the house itself.
4. Home Insurance
Renters may have to pay renter’s insurance, but homeowners insurance is often a lot more expensive. Renter’s insurance typically covers the contents of a property, while homeowners insurance must account for the value of the physical structure of a property as well. If there's a fire or natural disaster, insurance often covers the remainder of the mortgage or the cost to rebuild or repair the home.
Insurance policies offer different levels of protection and coverage, and premiums can vary greatly. The national average cost of homeowners insurance was $2,305 per annum, as of Feb. 2022. Compare this to the average $326 renters pay for insurance, as of Mar. 2022, making it one of the "cheapest insurances to buy."
5. Real Estate and Legal Fees
The mere act of buying or selling a home comes with costs. The seller is generally responsible for paying the real estate fees, which typically come in the form of a commission. According to Redfin, agent commissions tend to run about 6%. If you sell your home for $220,000, that means you are looking at paying about $13,200 in commission.
Both parties must pay legal fees to cover the transfer of title. As property transactions are complex and subject to specific state and local rules, it can be wise to hire a lawyer to help you navigate the process. Legal fees, of course, vary depending on the lawyer you choose.
The national average for legal services is $225 per hour, according to Thervo.com, a legal information website. Of course, the actual cost really depends on the requirements and experience of the legal team, as well as geographical location. As such, they can run as high as $400 an hour.
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.
6. Landscaping and Lawn Care
If your home has a yard, make sure you budget for landscaping and lawn care. Paying a landscaping company to care for your lawn could run you about $100 per visit, according to Fixr.com.
If you choose to do the work yourself, your costs will undoubtedly be lower, but you’ll still need to consider expenses such as 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 such activities as mowing the lawn and shoveling snow.
7. Homeowner Association Fees
Some developments charge a homeowner 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 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 its reserve to cover them. This may result in a hefty cost to the owners in a development. Those in HOAs should set some money aside to cover such unforeseen expenses associated with the maintenance of their communal property.
What Are Some of the Largest Expenses for Homeowners?
Some of the largest expenses for homeowners include regular monthly mortgage payments (which includes the interest you'll pay), property taxes, and annual maintenance. Homeowners insurance is also much higher than content insurance paid for by renters. People who own their own homes must also account for unexpected repairs, which is why it's always important to set aside an emergency fund.
Is It Better to Rent or Buy a Home?
Whether you should rent or buy a home depends on your own situation so there really is no definitive answer. Consider your financial situation, personal and work circumstances, as well as your long-term goals. But there are pros and cons for both.
Renting gives you some flexibility to stay or move, along with financial stability—you're likely only going to pay rent. But you may not be able to make any changes to the home and you may be locked in for a certain amount of time until you can leave. Owning a home, on the other hand, gives you equity. But it can be very costly.
How Much Does Renter's Insurance Cost?
The cost of renter's insurance depends on where you live. Busy metropolitan areas often charge renters higher premiums. But it is much cheaper than purchasing insurance if you owned your own home. For instance, the national average for renter's insurance was $326 compared to the national average of $2,305 that homeowners pay per year in insurance, as of Feb. 2022.
The Bottom Line
If you are a renter, remember that your landlord pays all of the expenses for your home, which means they are being factored into your rent. Other fees could include paying for an extra parking spot or the loss of part or all of your 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. But keep in mind that there are more expenses involved in owning a home than are immediately apparent. Just because your mortgage payments are less than your rent doesn’t necessarily mean that you’ll come out ahead in the short term.