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The Hidden Costs of Homeownership

Think you only need to worry about a down payment and monthly mortgage payments? Think again.

January 15, 2020


Homeownership is often portrayed as a straightforward and foolproof investment but, in reality, there’s a lot more to consider than what’s on the surface.

Although homeownership can be a great way to build wealth over the long term, it doesn’t come without risk. So if you’re in the market for a home, make sure you know all the costs that are often overlooked by first-time homebuyers.

If you think you only need to worry about a down payment and monthly mortgage payments, you’ll want to keep reading. Here is a guide to help you consider and account for all the hidden costs associated with homeownership:

Purchase-related costs: Oftentimes first-time home-buyers are caught off guard right from the jump. In addition to a down payment of as much as 20% of the purchase price, buyers also need to pay closing costs such as mortgage origination fees, brokerage fees, appraisal fees, and title insurance. These typically run anywhere between 2–6% of the sale price of the home, and Bankrate.com has a helpful chart with the average closing costs in all 50 states. Be sure you account for these costs before setting your budget for your home.

Mortgage interest: Have you thought about how much interest you’ll be paying over the life of a 30-year mortgage? A $200,000 loan for your home will really end up costing you $343,739.01, according to Bankrate.com’s calculator. In some cases, especially if you’re self-employed, you’ll have to pay private mortgage insurance of about 1% of the original loan amount each year. PMI may also come into play for first-time homebuyers who pay less than a 20% downpayment.

Property taxes: This is a major recurring expense that renters don’t have to think about. Some states and jurisdictions are pricier than others, so do your research ahead of time. You can find property tax information to prepare your monthly budget by visiting realtor.com. You will also want to account for annual tax increases, as this cost can be variable.

Homeowners insurance: Annual premiums average $1,173, according to the Insurance Information Institute. Homeowners insurance covers the dwelling and not just the things inside, making it more costly than renters insurance, which averages only $187 per year, according to ValuePenguin.

Association fees: Make sure you know ahead of time whether to account for homeowners’ association or condo dues. This cost, which will typically cover landscaping, snow plowing, and other important services, can be as much as several hundred dollars per month.

Utilities: Renters of course have to account for these costs, but utilities are typically more expensive for homeowners. You’ll be able to get an estimate for these monthly expenses before you complete a purchase. When you are touring properties, be sure to ask the current owner how much they typically spend a month on utilities.

On-going maintenance: One homeowner interviewed by CNBC was surprised to learn their lawn care would run about $300 a month. Pest control is another cost to factor in. The bugs and rodents that led you to call your landlord are now going to require you hire an exterminator.

Major repairs: Your roof will need to be replaced every 20 to 30 years at a cost of several thousand dollars. The furnace will need to be replaced, too. There’s just no avoiding these major repairs and replacements, so make sure to plan for them. The rule of thumb is to budget 1–2% of the home value per year on these expenses.

Add-ons: Although a major add-on like a new deck or bathroom remodel can increase the resale value of a home, there’s a significant upfront cost to these projects and you can’t always count on receiving a 100% return on your investment. And how about new furniture and decor when you move in? You may not want to use all the same items that were in your apartment. Plan accordingly to budget out for big ticket items to fill out your new home.

Legal issues: The legal website ARAG Legal notes that disputes with neighbors or government can lead to significant fees for attorneys.

Selling costs: When it comes time to sell your home, you’re going to be hit with more expenses for agent commissions and sales taxes. Your real estate agent will collect a commission of about 3–6% of the sale price. There’s also a pre-sale home inspection, home staging, and closing costs. Bankrate estimates all these costs and others can add up to 10% of the total sale price.

Conclusion

With the knowledge that all these hidden costs are lurking, it’s best to avoid buying the most expensive house you possibly can. Complete a specific, itemized budget before your home purchase to account for all these expenses that are lurking, and use this information to set a realistic home purchase price for yourself.

And remember, these costs vary widely depending on where you live, according to a Zillow analysis cited by MarketWatch. For example, while a typical homeowner in San Jose will pay an average of $20,655 for these costs over the course of owning their home, someone in Columbus, Ohio, will pay only $9,047.

One thing to keep in mind is that staying in a home for less than five years typically doesn’t make sense financially. Even in the best market scenarios, where home values are increasing at a rapid rate, the costs associated with the sale of a home typically won’t be covered by the appreciation of your home alone. You want to be able to spread these hidden costs across the course of decades, if possible.

If you decide that homeownership isn’t right for you, or if you’re just not ready to buy a home yet, head to Rhove.com to learn about how we are expanding access and opportunity for everyone to own in their community.

Rhove is loyalty rewards for renters. Unlike the traditional path to homeownership, Rhove provides an easy and rewarding way to save, invest, and plan for the future. Learn more at Rhove.com.