One thing I think that scares future homeowners the most about buying a home is the costs associated with owning a home. As a renter, there are some costs that you don't particularly have to worry about such as property taxes, HOA fees, homeowner's insurance and the biggest one of all, maintenance and repairs. When you're renting, if something breaks in the home you're living in, all you simply have to do is call your landlord or the property management company. But, when you're the owner, everything is on you.
Well, don't let those things scare you because the long term benefits of homeownership will outweigh all those things you fear so much. And just like a car, if you take care of your home, your home will take care of you.
If you've ever wondered what all costs are associated with owning a home, I'm going to break it down for you. Consider this your complete guide to the cost of homeownership.
Up Front Costs Associated with Owning A Home
First things first, the biggest costs associated with homeownership are the down payment and closing costs. These will be your biggest costs and are considered "up-front costs". On the bright side of things these costs are a one time cost. Once you're in your home, you won't have to worry about paying down payments and closing costs again unless you sell and purchase a new home. Then you'll have to start all over again.
As I stated in a previous post, down payments for your home can range from 3% - 20% of the home's sales price depending on the type of loan your mortgage company approves you for and whether or not you want to avoid paying mortgage premium insurance. If you're approved for either a VA or USDA loan, you may qualify for a 0% down mortgage loan.
Closing costs are also apart of your up-front fees and can run you anywhere from 3% - 6% of the home's sale price.
For example: Sales price of your home is $400,000. Down payment at 3% will be $12,000 on the low end and $80,000 on the high end at 20% down. Closing costs on the same home would be $12,000 on the low end at 3% and $24,000 on the high end at 6%.
If you were to get your home on the low end, you would have to bring about $24,000 to the table at closing. Again, how much you will have to bring to the table up front is solely determined by your home's sale price. You can use the same calculations to determine exactly how much you would need up front.
Now let's get into the Day-to-Day Costs Associated with Owning a Home
Just like your rental home, the day-to-day costs associated with owning a home are pretty much the same with the exception of property taxes, insurance, maintenance and repairs, and Homeowners Association (HOA). if applicable.
Let's get into it...
Utility Bills
Anywhere you live, you're going to pay utility bills. When you live in an apartment or condo, some of the utility bills may be divided between the entire unit which means those bills could possibly lower than those of a homeowner .
Utility bills include all the electricity gas and services you require to keep your home functioning on the inside. The cost of the utility bills can depend on where you live, the size and features of your home.
Cleaning and Upkeep
We all know that in order to keep our homes looking good, safe and free of pests, we have to keep it clean. Most of us don't have a housekeeper coming in on the regular so we have to do it ourselves. Whether you pay someone or do it yourself, you still have to pay for it.
You're already used to purchasing "housekeeping supplies" which includes laundry and cleaning supplies, but now you also have to consider buying supplies for your lawn as well. On average, between the two you'll spend a little over $200 a month on these things.
Homeowners Association (HOA) Fees
Nowadays, most communities form a Homeowners Association, especially new build communities. Of course with these associations, there are some fees. Some fees are billed monthly and some on an annual basis. The average HOA fees can run you anywhere from $200 - $300 a month or $500 or more annually.
If you choose to live in a neighborhood with a bunch of amenities, more than likely you'll have to take part in their HOA. The more amenities, the more you'll have to pay. So, if you like living in communities with pools, tennis and golf courses, basketball and tennis courts, etc., get ready to dish out those coins.
HOAs also help with the upkeep of the common areas of the community. The funds paid by the residents are what help maintain those. in the event the HOA runs out of funds, you all will be charged a "special assessment" to cover those. The "special assessment" is in addition to the normal HOA fees.
Property Taxes
Well you knew this was coming as we're taxed on EVERYTHING we do. Property taxes are one of the costs associated with owning a home, but luckily it's annually. Depending on the type of loan you have, it can also be billed along with your mortgage which will help you make the payments monthly.
The average annual property tax is around $3300 annually.
Insurance
Mortgage insurance is another cost associated with homeownership and it will be included in your mortgage payment.
Typical homeowners insurance runs anywhere from $1000 - $2000 a year. The amount you pay for insurance will depend on how much insurance you need.
Whether or not you need mortgage insurance will depend on whether or not you're getting a mortgage. If you're asking the bank to finance your home, you will be required to have mortgage insurance. The only way you can escape having no mortgage insurance is getting a conventional loan and paying down the 20%. This will cancel your need to have private mortgage insurance. If you do start off paying your mortgage without putting down 20%, once you get to 20% equity n your home, you have the option to drop the PMI.
FHA comes with its own type of mortgage insurance and can't be avoided no matter how much money you put down. Any borrower who puts down less than 10% will be required to keep the mortgage insurance for the life of the loan. The only way to get out of this would be to refinance into a conventional loan.
FHA loans require an upfront mortgage insurance premium which must be paid at closing. The upfront fee is 1.75% of the loan amount.
Maintenance and Repairs
Here are some things you didn't have to be concerned about when you were renting because if something were to go wrong or break, you could just call your landlord or the property management company and have them fix it. With owning a home, you're now responsible for maintaining your home.
Home maintenance and repairs are one of the biggest costs you may experience after you purchase a home. In order to help you prepare for repairs and maintenance of your home, it's a good rule of thumb to put aside about 1% of your home's value each year. This way when something happens, you won't be caught with your pants down so to speak and will be ready to take care of those repairs.
Maintenance and repairs can include things like roof issues, water damage, plumbing problems, HVAC system, chimney sweeping (if you have an actual fireplace and not the new floating ones that don't require a chimney), possible foundation issues, and pest removal just to name a few.
If you're smart, you will also get a home warranty, such as American Home Shield to help with some of these maintenance and possible repairs. I always encourage my buyers to do so. It really helps with the costs. You'll have to pay a fee and/or deductible for service calls, but it's better than paying everything in full out-of-pocket.
Make sure you're financially prepared to not only pay your mortgage, but consider possible repairs and other day-to-day costs associated with owning a home. Don't be scared to purchase a home because of this, but just be prepared.
Hope this helps. As always, happy house shopping!!!
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