Preparing to Buy: Estimating the Costs of Homeownership
It's pretty easy to budget for the roof over your head when you rent. Your monthly payment includes property repairs, taxes and even some or all of your utilities. Budgeting when you're a homeowner isn't as easy. Consider these "hidden" costs when determining how much you can afford to spend on your new home.
When determining how much they can afford to spend on a home, many prospective homeowners use mortgage calculators. Potential buyers can input their income, current bill payments and perhaps property tax rates and insurance costs, and the calculator kicks out an estimate of what they should be able to spend on a home.
Mortgage calculators, while very useful for coming up with rough estimates, are no substitute for the detailed budgeting exercises that home ownership education can give you. Here are some costs of home ownership that a class or counselor might cover.
Home Maintenance and Repair
Expect the unexpected. Home appliances tend to break at the most inopportune times. Heating systems almost never die in the summer; they do it in the winter. And your plumbing is all but guaranteed to fail when you're expecting house guests.
The only thing worse than experiencing repair issues, is having no money to take care of the problem. Liz Weston of MSN.com asked several experts about budgeting for home repairs. The experts said you should expect to spend at least 1% of your home's value per year on maintenance and repair, and to plan for more if your home is older or has been poorly maintained. On a $300,000 house, that's $3,000 per year. Put $250 a month aside for these expenses and save yourself a lot of grief when a repair arises.
One way of smoothing out the budgeting a bit is to purchase (or get the home seller to purchase) a home warranty. That covers most repairs, and you're responsible for a co-payment of about $35 per incident. What does home maintenance entail? You may be surprised -- check out Freddie Mac's home maintenance checklist to see what you'll be taking care of each year if you want your home to be in good working order. Never underestimate the maintenance costs.
Your mortgage lender may require that you get mortgage insurance if you put less than 20% down. You'll also have to get homeowners insurance unless you buy a condo and it's included in your homeowners association dues. If your property is in a flood zone (as designated by the Federal Emergency Management Agency) you'll be required to buy flood insurance as well. You may also want to purchase extra coverage if earthquakes, mud slides, tornadoes, hurricanes or tsunamis are possibilities.
Additionally, if you keep valuables like jewelry, electronics or artwork in your home, you may have to buy extra coverage.
Homeowners Association (HOA) Dues
Condominium owners save on some of the above-mentioned costs (the external building repairs and maintenance are taken care of by their associations), but they have to pay homeowner association dues. The more features the community offers, such as guarded gates, swimming pools, gyms, etc., the higher the monthly dues will be. Other communities may also charge HOA dues -- even regular housing developments may have communal areas and charge dues to maintain them. Don't leave these expenses out when budgeting how much you can afford each month.
As a renter, some or all of your utilities may be covered by your landlord. Perhaps you didn't pay for water or heat. You almost certainly didn't pay for trash or snow removal. You may even have gotten your gas or electricity included in your monthly rent. But as a homeowner, you'll be responsible for all of those things. You may have to come up with deposits to the utility and phone companies to turn on their services as well.
Furnishings and Appliances
Your new home is likely to be bigger than your apartment and will probably require some extra furnishings. While some appliances like dishwashers and ovens are considered fixtures and included in your home's sale price, portable appliances like washers, dryers and refrigerators are not. If you don't get the seller to throw them in, you may have to buy new ones.
Consider also the age of the home you are buying. If it's ten years old, your dishwasher, garbage disposal, washer and dryer and water heater may all be on their last legs. Here's an appliance budgeting worksheet from Freddie Mac that illustrates how much you may have to come up with soon after closing on your home purchase.
By going into your home purchase well informed of the costs of homeownership, you can avoid expensive surprises. Budget for these expenses from day one, and your home can be more of a haven and less of a burden.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
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