True Cost of Home Ownership

Leave a Comment Everyone who rents gets sick of it eventually. House for SaleAnd then the renters begin to dream.  They begin to dream of the day when they will no longer have to live their lives subject to the whim of a landlord. That dream usually manifests itself in the form of home ownership. However, there are more costs associated with owning a home than just the mortgage that need to be considered.

The Additional Costs…

Down Payment: The generally accepted size of a down payment for a house is 20% of the home value. So, a $200,000 home equals a $20,000 down payment. Yes, this rolls over into what is known as equity, but you still have to have it upfront.

Private Mortgage Insurance: Borrowers who put down less than 20% of the cost of the home will be required by the lender to obtain a type of insurance that protects the lender from harm if the borrower defaults on the loan. The monthly amount paid will vary depending on down payment and size of the loan, but a safe assumption would be around $100 a month. This can be completely avoided by having a down payment of 20% or more.

Property Tax: Just like purchasing a car, when you purchase a home you’re required to pay property taxes. The national average as of April 10th, 2007 was 1.38, with Texas at 2.57 and Hawaii at 0.40. So on that $200,000 house in Texas, you would pay an additional $5140, and in Hawaii, only $800. That’s every year, by the way. Home Owner’s Insurance: This is something you’ll have to have in order for the bank to grant you a mortgage. It operates just like other types of insurance; you pay a monthly premium in exchange for being covered in the event of damage or destruction being done to the house.  Like other insurance plans, the cost depends on location, price of house, likelihood of natural disasters, and other factors. The average annual cost of home owners insurance in America for 2006 was around $800, with some states such as Florida and Texas having much higher rates. Interest: Just like any other loan, that amount you pay every month doesn’t all go to the principal. Yes, this is the nature of a loan, and you really can’t avoid paying interest unless you buy your house with cash, but when compared to renting, all of the money you fork over to your landlord per month goes to one simple thing- your rent. I should also mention that some of the interest paid is tax-deductible. Furnishings: Hopefully your new home will be bigger than the apartment you’ve been renting. However, a bigger living area comes with more empty space. With more empty space comes the urge to fill that empty space with new furniture, decorations, and other nick-knacks whose cost can add up when all is said and done.  Repairs: A house comes with a lot that can go wrong, such as air conditioning, heating, and plumbing, not to mention appliances. It’s recommended by financial advisors that home owners set aside around 1-3% of the value of their home per year for repairs. So on that $200,000 home, set aside $2000-$6000. That means moving about $170-$500 a month to a separate account just for repairs.

Crunching the Numbers…

So let’s play with some numbers. Let’s say your monthly rent is around $1100. By looking at just this number, you think to yourself…

“If I can afford my $1100 rent a month, then I could afford an $1100 mortgage payment!”

Except that mortgage payment will come with the additional fees described above, including about $230 a month for property tax, around $70 a month for home owner’s insurance, and at least $170 a month for the repair fund. All together, the equivalent of renting for $1100 a month is now $1570. Keep in mind all of this is rough, generic math and will vary by a decent amount depending on individual situations.

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