Relatively low mortgage rates and soft prices in some residential real estate markets are creating renewed interest in homeownership, especially among young people who are tired of seeing their rent costs rise every year and like the idea of having equity—an ownership stake—in the place where they live.
A residence can indeed be a valuable asset and a path to a greater financial future. However, novice buyers may be shocked by the bite homeownership can take out of their wallet. In addition to their mortgage payments, the true cost of owning property involves a multitude of hidden expenses. The first three hidden costs are strictly financial; the rest add to money woes the extra stress of home maintenance and repair. Let's look at the most common, and how to deal with them.
- Though homeownership has many perks, there are some extra and unexpected expenses to watch out for.
- Some costs are strictly financial and beyond your control to a large extent: property taxes and homeowners association (HOA) fees.
- Homeowners insurance can cost more than you expect if you live in a natural-disaster–prone area.
- The most costly part of homeownership typically relates to upkeep and repairs of the roof; the HVAC, plumbing, and electrical systems.
As a homeowner, you'll need to pay property taxes. It's not the bank that determines the property tax, it's the township, city, or county in which the home is located. An ad valorem property tax payment—assessed according to the value of your residence—can easily total $500 to $1,000 or more a month, particularly in the northeast U.S., where real estate values have soared in recent years.
Property tax is basically a guaranteed perpetuity payment made at the homeowner's expense. Although you don't have much say in how much it is, as with any tax, strategies exist for lowering it.
HOA and Condo Fees
If you buy a residence within a homeowners' association (HOA) or a condominium association, you'll be required to pay a monthly or quarterly fee. This charge often includes costs for things that benefit the entire neighborhood, like garbage collection or snow plowing, if your association has contracted with a private company to perform these services.
HOA fees can rise, or your association may need to charge a special assessment for projects, such as repaving the parking lot, installing a new security system, or revamping common areas or buildings.
Homeowners insurance may not be an unexpected expense: banks and mortgage companies often require it before issuing you a loan, and the premiums may even be included in your mortgage payment (if your lender helped you obtain the policy). Bear in mind that premiums can and often do, rise annually—or if you increase coverage to reflect the rising value of your property or possessions.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development (HUD).
What can also afford a nasty surprise is thing your policy doesn't include. Typically, homeowners insurance does not cover "acts of God," meaning that you will need to purchase extra coverage against disasters like floods, hurricanes, and earthquakes. Even water damage from storms is very rarely covered in a basic homeowner's policy.
Unfortunately, this extra insurance can be expensive or have an unusually high deductible. For example, separate flood insurance typically costs between $1,000 and $4,000 per year over and above the $500 to $1,000 a year that most homeowners typically spend on their basic home policies.
Sometimes expenses such as property taxes and homeowners insurance are bundled into mortgage payments. This is commonly known as PITI: principal, interest, taxes, and insurance. Lenders prefer PITI to be equal to or less than 28% of a borrower's gross monthly income.
Water is your home's biggest enemy, and one of the roof's primary jobs is to keep water out. A leaky roof can cause cosmetic damage to the inside of a home and,
depending on how severe the leak is, destroy the belongings inside,
and cause health problems or structural issues.
Roof damage usually results when the asphalt shingles become loose, cracked, blown off, or damaged by hail. The nails that fasten them to the roof could also raise, allowing water to get underneath and into your home if any part of the shingles or roof had been poorly installed in the first place.
Asphalt shingles also have varying expected maximum life spans, depending on the quality of the shingle. Under normal circumstances, the roof will need replacement once at least every 20 years. However, roofs have varying life spans, depending on the type of shingle used, installation quality, climate, and weather.
The Heating, Ventilation and Air Conditioning (HVAC) System
Because of its complexity, your home's HVAC system—which controls heat, cooling, and the circulation of air throughout the residence—is not something you'll be able to inspect, repair or replace yourself. Unless you're an HVAC professional, you should be prepared to hire one from time to time.
You'll probably need to buy new units at some point, as the existing ones wear out over time. Replacing the furnace and air conditioner filters frequently helps keeps the machines running efficiently. Homeowners with gas furnaces should have them inspected once a year. In many areas, this service is provided at no charge.
The Electrical System
Arc faults, faulty wiring, and electrical shorts cause a fair number of electrical fires that burn down homes. All homeowners should have a basic understanding of how electrical systems work to keep homes and families safe, but should also understand the limitations of their skills. Why risk electrocution or damage save a few bucks?
Whenever there's a systemic problem, or you're doing significant rehab work, call in the pros—trusted, trained and licensed electricians to make sure things are installed properly and according to current codes and safety standards.
Small plumbing problems (like clogged drains) happen from time to time no matter where you live, and they aren't a big deal to fix with basic plumbing knowledge.
Some older homes present larger problems when it comes to plumbing, though. These homes often contain galvanized iron water pipes, which become clogged with mineral deposits over time and gradually reduce the water pressure in your home. These pipes cannot be repaired; they have to be replaced.
Also be sure to research whether your water could be contaminated with lead related to your plumbing. Sometimes the problem is pipes in the home and sometimes it is the pipes from the municipal system to your home.
Termites are attracted to wood and moisture, and they can get into your house through even the tiniest of cracks. You don't want your home turning to dust right under you.
To prevent expensive structural damage to your home, make sure there is no wood touching the ground near your house (like lumber, firewood, or tree stumps). Prevent any moisture from accumulating around your foundation by making sure the ground slopes away from your house, and hire an exterminator to regularly perform a pest inspection.
Mold can grow in humid or damp areas and can cause health problems. If your HVAC system is contaminated, you can spread mold throughout your home every time the furnace is running.
Preventing mold problems is a matter of keeping water out and fixing any leaks to eliminate any environments conducive to mold growth. If your home is very humid, an air conditioner or dehumidifier will help prevent mold growth. Mold is not always visible; it can be hidden behind wallpaper, under carpeting and in a variety of other places. Mold can cause allergic or irritating reactions and asthma attacks.
Landscaping and Lawn Care
Whether you handle your yard work yourself or hire a professional, you will have to pay something to keep your landscaping in check. Lawn equipment can be costly and, if you have a lot of acreage, you may need items such as a snowblower or a leaf blower, too.
This isn't just cosmetic. Hanging tree limbs can fall and damage roofs and windows; a plethora of leaves or overgrown plants can clog gutters, impacting drainage and plumbing systems—both yours and your neighbors. Many HOAs require members to maintain the grounds of their homes for these reasons.
The Bottom Line
When most people think about the costs of homeownership, they think only about the monthly mortgage payments on their residences. But there are also property taxes and insurance to consider and budget for. But maintenance and repair costs will eat up their fair share of your disposable income, too.
In fact, unexpected repairs—think replacing or repairing the roof, fixing loose tiles in the shower, removing an overgrown or dead tree, or paying for mold mitigation in a damp basement—typically leads to the highest bills. The list of possibilities is endless, so the best thing homeowners can do is to set aside savings for an emergency. Some financial experts suggest budgeting for 1% or 2% of your mortgage balance as a yearly maintenance and repair fund, but the amount you should save depends on the age, condition, and size of your home.
Mortgage lenders won't factor this into their equations when determining a loan amount, but you should. It's a good thing to own your own home—but before you buy, make sure you're prepared for the true cost.