The Real Cost Of Home Ownership

According to a research analysis from Zillow and Thumbtack, homeowners can look forward to spending an extra $9,080 in hidden expenses, which adds up to around $757 per month. while some expenses are avoidable, others are not. These include property taxes, utilities and homeowners insurance. Avoidable expenses including hiring a landscaping service, household help or home maintenance tasks such as carpet and gutter cleaning can add an extra $3,021 to their yearly expense.

Zillow also found that around 40 percent of first time home buyers went over budget. This is most likely due to the fact that first time home buyers only consider the cost of the home itself without considering future expenses. To help create a realistic view of what you can expect financially, We’ve put together this list of a few of the most common hidden expenses you may encounter when buying your home.

Property Taxes

The average homeowner will end up paying $2,110 according to Zillow’s study. Property tax is known as a real estate ad-valorem tax. This tax is based on the value of the property and determined by the area government. Property taxes help to pay for public schools, parks, snow removal, public pools, and other community services. In fact, many smart homeowners begin their house hunting search by scoping out neighborhoods with the lowest property tax.

Utility Costs

Utility costs will mean that most homeowners will have to shell out $2,953 for their gas, water, electric as well as cable and internet services. Due to their individual nature, utility costs will vary from household to household. For instance, the larger your home, more electric and water you use, the more your utilities will be According to Move.org your average cost per month for the following utilities are:

• Electricity: $183
• Natural gas: $82
• Water: $40
• Sanitation: $12 to $20
• Cable TV plus internet: $47

Just by installing low-flow water fixtures, weather proofing your home, insulating the attic and switching the lights off in unused rooms can work wonders in reducing your utility rates. In fact, the simple act of replacing your standard light bulbs with LED or CFL lighting can save over $75 per year! Note that there are some homeowners who have purchased a set of outdoor solar lighting, and devote those lights solely for indoor use to save even more. Also, when shopping for appliances, look for Energy Star certified products. Finally, to eliminate guesswork, if you are interested in a property, you can request that the seller show you their utility bills in order to give you close estimate.

As you can see, unless you opt to live completely off the grid, you’ll be faced with utility payments, which on average amount to 25 percent of housing costs. Depending on where you live, you may even have to pay for trash pickup as well. During your house hunting quest, we suggest that in order to give you a sound estimate of utility expenses in the location you’re zeroing in on, we suggest you go to UtilityScore.com.

Homeowners Insurance

Floods, storm damage, and accidental mishaps are all part of the possible, unforeseen risks that a homeowner faces every day. In order to cover these risks, the buyer is required to take out homeowners insurance. The typical homeowner will be paying $996 in insurance premiums per year. Homeowners insurance handles any losses incurred to your home and/or assets, as well as liability coverage should someone have an accident on your property. Homeowners insurance is a necessity as you cannot get a mortgage without the property insurance. It should be noted that homeowners insurance is not the same as mortgage insurance. Homeowners insurance covers your home, while mortgage insurance is the amount which must be paid if the buyer paid less than 20 percent down payment.

 

The True Cost of Home ownership

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From the Zillow study alone, it should be clear that your home is more of a wise use of your resources and not an investment. In fact, your home demands much from your annual income to pay for it each year. Not only that, the mere act of purchasing a home can cause people to suffer anxiety. A study commissioned by home.com found that one in every three first time home buyers found themselves riddled with nerves, tears and frustrations, with one in ten experiencing buyer’s remorse. The fact that first time home buyers are not fully educated in the process or prepared for what in involved leads to the stress. While what Zillow and Thumbtack have reported is crucial for those looking to purchase their own home, those are not the only costs involved. so lets take a look at your other expenses.

Down Payment
A down payment is comprised of a cash payment when you purchase something on layaway or an expensive item. The down payment is a predetermined percentage of the total price of the item, and not refundable. When you purchase a home, you are expected to make a down payment of 20 percent on the purchase price. For instance, if you purchased a home for $150,000 your down payment would be $30,000. If you put less than 20 percent, then you’ll be required to purchase mortgage insurance, or PMI.

Closing Costs
In order to complete the sale, either buyer or seller will be asked to pay closing costs. These costs involve whatever was involved in closing the sale. These costs can include appraisal fees, title insurance, land surveys and are usually between 2 and 5 percent of the purchase price. .

Mortgage Payment
When a lender loans you money for your home, it’s called a mortgage. The amount is usually around 80 percent of the home value, with the house acting as collateral. Each monthly mortgage payment is comprised of a principal, interest, taxes and insurance.

• Principal: The principal is the dollar amount you borrowed to purchase your home.
• Interest: When you get a loan for your home, you pay a fee to your lender, that is referred to as interest.
• Property Tax: Property taxes help to handle expenses related to covering community costs, such as maintaining public libraries, schools, and sanitation needs.
• Private Mortgage Insurance: If your down payment is less than 20 percent, your lender may ask you to pay private mortgage insurance.

HOA Fees
Certain communities and condo associations may require that you pay home owners association fees each month, in addition to your mortgage, property taxes and other expenses. Typically these fees will be equal to an additional few hundred dollars each month. Along with the additional expenses, you will also want to investigate the type and scope of any restrictions that may accompany your HOA.

Putting it all Together

To help give you a visual of what all of the above factors mean, we’ve included a sample table. Below is an example of what a mortgage payment would look like for the first 10 years if the principle was $150,000, borrowed at a 5 percent fixed interest rate, payable for 30 years. The monthly payment would be $805.23, the total interest paid over 30 years is $139,883.68, and the grand total is $289.883.68. This table also lays out the numerical data which shows you that your home is most definitely not an investment. However, a home can be a smart way to invest your cash, and possibly give you a return in the future.

Source: amortizationtable.org

 

Hidden Costs of Home Ownership

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Now that we have the ‘Big Three’, property taxes, homeowners insurance and utilities, out of the way, it’s time to look at some of the hidden costs of home ownership. The hidden costs can include anything from surprise repairs to needing a new dining room set or entertainment center. We’ve taken the time to outline a few of the more important ones for you. Please keep in mind to do your research when it comes to possible future expenses. For example, before you go house hunting, it’s a good idea to take a look at what home improvement projects actually cost, so when you come upon that cute, little brownstone on the corner with the crack in the foundation, realize you’ll be responsible for the final cost of fixing that foundation which could be as much as $450 to $11,500.

Discretionary Expenses
Furniture and housing accessories are considered a discretionary expense. If this is your first home, there is a good chance you’ll be in need of some basic essentials, such as kitchen appliances, or dining set. In order to avoid becoming house poor, know that your discretionary income is the amount you have after paying for your essentials, such as taxes, utilities and homeowners insurance. If you’ve no cash left over after paying your essentials, you have no discretionary income.

Moving Expenses
Moving expenses are to be considered part of your cost in purchasing a home. These can include paying a moving company, purchasing packing supplies, paying for packing services, moving insurance, renting a trailer or paying for storage. While average costs vary, expect to pay around $80 to $100 per hour for local moves, and $2,000 to $5,000 for moves over 100 miles, according to HomeAdvisor:

• 1 Bedroom apartment $200 to $500
• 2 Bedroom apartment $400 to $700
• 3 Bedroom house $560 to $1,000
• 4 Bedroom house $800 to $2,000 plus

Remember, your moving costs can be deducted if you are moving due to a work transfer, or to begin a new job or business. You can also save money on moving costs by DIY, and renting a truck. In order to get the best price, we recommend that you shop around a bit before you choose a mover. Check to see if the rates will be lower if you move in the middle of the week, rather than the weekend.

Lawn Care
Having manicured and neatly trimmed yards increase the curb appeal of your home. However, whether you do it yourself, or hire someone else to do it for you, you’ll have to put forth some out of pocket expenses. These include snow shovels and salts for winter, and gardening tools, fertilizer, and plants for summer. According to HomeAdvisor, the average price range for lawn care is from $100 to $200 per month, while hiring a professional gardener can go from $50 to $100 or more.

Mold Removal
Often overlooked mold can be found in both new and older homes, and can grow into not only an unsightly problem but a deadly one. Mold is the direct result of too much humidity in the air. Once the humidity level exceeds 60 percent, mold will gain its footing and begin to cause issues. This humidity is often due to leaking pipes or foundations. If not tended to, mold can grow into a health problem, which adds unwelcome medical bills. According to HomeAdvisor, the national average to removing mold is $2,233, with the range going between $1,120 and $3,340.

Furnishing
According to a study by Forrent.com, the average person can spend up to $8,176 on furniture, including items for the patio. Most will have what they need. However, if you are a first time buyer, chances are you may have to purchase a few things for the kitchen or living area. In order to keep costs down, consider shopping thrift stores or looking at furniture liquidators such as Fort Pitt Hotel Furniture for some amazing deals.

Maintenance and Repairs
Before you purchase that “Fixer-Upper” at that nice, low price it might be a good idea to look a head and see the possible maintenance costs involved. Everything from your roof, porch, plumbing or hot water tank and more will need to be maintained and repaired at one point. In fact, no matter how well you maintain your home, you just never know when something will need to be repaired. That’s why experts suggest that you anticipate that at least 1 to 2 percent of your yearly income be set aside for surprise maintenance visits. So, if your home is worth $130,000, you’ll need to set aside $1,300 or more. To keep things straight, it can’t hurt to have a ‘no touch’ savings account just for home repairs alone.

When house hunting it’s important to be lead by your head, rather than your heart. In other words, in order to keep your true housing cost as low as possible, put the infrastructure of the home ahead of the lovely picket fence and rose garden. Keep in mind that if you fall in love with a home that has a kitchen in disrepair, according to themortgagereport.com, the kitchen up grade can cost up to $22,140. Similarly, a bathroom remodel will cost $9,723, a roof replacement $7,312, furnace replacement $4,220, and so on. To get a clearer picture of potential home repairs and their costs, HomeAdvisor has put together the following infographic:

The True Cost of Home Improvement – An infographic by HomeAdvisor

 

Sewers
A sewer blocked by tree roots is not only an inconvenience, but an unnecessary expense. Before you purchase your home, contact a company that specializes in performing sewer scopes. According to homeinspector.org, sewer repairs can run you around $5,000 or more, depending on the extent of the problem. Considering a basic sewer scope of your pipes will cost you from $85 to $300, it’s an absolute necessity to ensure you don’t end up with a home fraught with sewer backups.

Hire a Home Inspector
Once you arm yourself with knowledge of the numbers involved, and prepped yourself by examining the possible hidden costs of home ownership, it’s time to get ready to look for that home. But wait, there’s just one more thing we have to suggest: Hire a professional home inspector. Notice we said ‘professional’. Not your uncle Bob. By having the home you wish to purchase thoroughly inspected, you can save yourself much in the way of future expenses.

According to HomeAdvisor.com, the average price for a home inspection is $315. That is a small price to pay for peace of mind when purchasing a property. Home inspectors will examine the foundation, appliances, pluming, roof, attic, electrical system, and furnace. If you bypass a damaged roof, it could end up costing you between $336 and $1,257 or more. However, if you paid for an inspector, they’d catch it right away. If you’d like your home inspected for radon, termites, mold, lead or asbestos, then you’ll be required to pay a bit more. When all is said and done, a qualified home inspector can save you thousands on future home expenses.

 

What is House Poor Living?

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When it comes to talking about the real costs of home ownership, one must confront the issue of becoming “House Poor”. This refers to anyone who purchases a home, and finds themselves living for their home instead of themselves. Here, people will overspend on non-essentials, which leaves them without money to invest or save. People who are house poor often have gorgeous homes, but little else including money left over for food.

How to Avoid Becoming House Poor: Basing the Purchase on Income

The rule of thumb is that all of the housing expenses previously mentioned, stay under 28 percent of your monthly income, which is the maximum recommended percentage of your HDTI, or housing debt to income ratio. This means that before you set out to even look for a home, you should realize that in order to avoid the house poor debacle, that you take a long, hard look at the true cost of home ownership, and base your final choice on your income, not your desire. You may want a large home in the hills, with a built in pool, but that could leave you eating cereal for dinner for the next 10 years. Here is a quick way to make an estimate:

     Total all monthly housing expenses/gross monthly income = percentage of earnings for housing costs

     Monthly expenses = $1,200

     Monthly Gross Income = $5,000

     1200/5000 = 0.24

     24 percent

So, in the above example, 24 percent of your monthly paycheck will go towards your home expenses, which is below the suggested maximum of 28 percent. So, you need an annual income of at least $60,000 per year to be able to avoid house poor living. This simple formula can help you avert putting all of your savings into a home, and munching on corn flakes every night for 10 years.

 

Conclusion

When all is said and done, the act of purchasing a home can be a difficult, confusing and frightening experience for most individuals. Many people enter the house hunt and depend solely on their real estate agent to ‘figure it all out’. Unfortunately, if you take this path, you may end up house poor or with a lemon. By taking a few precautionary measures, such as becoming familiar with amortization tables, basic calculations, and realizing that the the price you pay for your home depends not on your desire for the home, but your present income level, you’ll find the experience not as trying and daunting as those who enter the fray unprepared.