- Marc Rovner
The Hidden Costs of Homeownership
Ready to make the leap to homeowner? Your immediate considerations may be finding a property in your price range and saving enough for the down payment.
Buying a home should also involve making sure you can afford the long-term costs of ownership. Once you become a homeowner, you’ll quickly discover many financial responsibilities you may not have planned for. These expenses might come up monthly or annually, or they could be unexpected. For example, what if the boiler dies or breaks down earlier than your home inspector estimated?
Read on for more information about ways to manage some additional, hidden costs of homeownership.
1. Mortgage Interest
Before the house hunting begins, you’ll need to make sure your credit is in good shape because that determines whether you qualify for a favorable mortgage loan interest rate.
That’s important because a portion of your monthly mortgage payment goes toward interest, and a higher rate can add tens of thousands of dollars to the cost of your mortgage over time.
Review your credit report. Bring any overdue accounts up-to-date and correct any errors in the report that could damage your credit score, a measure of creditworthiness. Next, check your FICO score, which is widely used by lenders. The higher the score, the lower the interest rate you’ll likely be offered.
Even small improvements to a credit score can have meaningful results. As of early February 2021, a homebuyer with a 695 FICO score could qualify for a 30-year, $300,000 mortgage at a fixed rate of 2.76%. Increasing the score to 700, the borrower could lower the rate of 2.58% — an interest savings of $10,068 over the mortgage term.
2. Property Taxes
Your property tax will be based on your jurisdiction’s property tax rate and the assessed value of your home. Tax bills differ widely across the country, but you can count on paying hundreds – if not thousands – of dollars each year. New Jersey has the highest median property tax rate at $2,417 per $100,000 of assessed value.
Many jurisdictions restrict how much property taxes can rise. As a homeowner, you will be able to appeal your assessed home value if you think it’s too high compared to comparable houses in your neighborhood.
These costs can eat up a big chunk of a homeowner’s budget. On average, homeowners spend nearly $400 a month on utilities, which includes water, trash, electricity, gas, cable TV and internet service. That’s far higher than the $100 to $150 that the average renter pays each month.
There are many ways to lower your utility bills.
· Wash clothes in warm or cold water, not hot.
· Reduce the temperature on your water heater.
· Replace dirty air filters regularly so heating and cooling system works more efficiently and last longer.
· Install a programmable thermostat that allows you to control the temperature in the house and your energy usage when you’re sleeping or away.
· Look for energy-efficient appliance models that can further lower your utility bills.
4. Maintenance and Repairs
Homes require continuous upkeep, and the older the house, the more maintenance is required. Some maintenance is routine and anticipated, such as yearly gutter cleaning, seasonal lawn care or snow removal, an annual heating and air conditioning inspection and service, or a periodic fresh coat of paint for interior walls. Other maintenance is unexpected such as roof damage or a water heater that springs a leak.
To handle routine and unexpected expenses, create a home maintenance fund that’s separate from your other savings. A popular guideline is to set aside 1% of your home value each year that you can tap as needed to make repairs or replace appliances. On a $300,000 home, you would salt away $3,000 annually.
5. Homeowners Insurance
The average annual premium is $1,249 for the most common policy, although prices vary widely. Premiums are higher in areas that are prone to natural disasters or in heavily populated locales that tend to have steeper construction costs. The amount you pay may also be tied to the size and age of your home, as well as whether it’s brick or more flammable wood.
Each insurer has its own criteria for setting rates, so it’s wise to shop around for the best price. As you compare, consider these ways to reduce premiums:
· Choose a higher deductible and avoid making small claims. The standard recommendation is a $500 deductible, but you can save as much as 25% off your premiums by doubling the deductible to $1,000.
· Add safety features, such as smoke detectors, deadbolt locks on doors and an alarm system.
· “Bundle” your insurance, which is buying more than one type of policy from the same insurer. Buying auto and home policies from the same company, for example, can trim five to 15% off the cost of insurance.
· Maintain good credit. Most states allow insurers to use credit scores as a factor in setting premiums.
6. Often Overlooked Costs of Home Ownership
Condominiums, townhouses or even a single-family home in a community with shared amenities, such as a parking garage, clubhouse, or swimming pool, likely carry an HOA membership fee to cover regular maintenance of communal areas. It also builds a reserve fund to take care of major or emergency expenses, such as repairs after a tropical storm. Monthly homeowner or condominium fees average $170 nationally but vary widely depending on the size and location of your home.
Ask about the history of HOA fee increases before buying a property. Make sure the property’s reserves are adequate. You don’t want a major expense to wipe out the reserve fund right after you purchase the property, possibly forcing you and your neighbors to kick in more money to cover any shortfall.
Protect your Investment
What happens if you carefully considered all the potential costs of homeownership, but suffer a drop in household income? It’s not as uncommon as you think. What if there is an unexpected lien or encumbrance on your property?
You can protect against this possibility with adequate title insurance.
Learn more about how title insurance can help families protect their largest asset – their home – by visiting our website at www.betaabstract.com