The American Dream – Home Ownership! When buyers (especially first-time buyers) consider purchasing a home, the most important cost to most is the monthly mortgage payment, which makes sense since this payment can account for as much as up to about 36% of a home buyer’s monthly income. However, many home buyers don’t realize there are additional costs of ownership that they probably didn’t have to deal with in a rental situation.
Here are some of the additional costs of homeownership that often get overlooked, yet should be considered for budgeting purposes:
• Property Taxes. While most homeowners’ property taxes are impounded as part of their monthly mortgage payment (most lenders require impounds unless a buyer puts down at least 20% of the purchase price), many owners forget this isn’t a fixed cost, as property taxes will typically adjust with market conditions, which in an appreciating market would typically mean increasing annual property taxes. As such, a homeowner may find his monthly mortgage payment increasing over time if the market is in an upward trend (the type of market most homeowners hope for!)
• Homeowner’s Insurance. Like property taxes, homeowner’s insurance is typically impounded into the monthly mortgage payment; and also like property taxes, homeowner’s insurance has a tendency to increase over time, which may result in a higher monthly outlay.
• Natural Disasters. While most homeowner’s insurance policies cover basic “acts of nature”; e.g., wind storms, hail and fire, they may not cover all forms of natural disasters. Earthquakes and floods are two of the most common types of disasters not covered by homeowner’s insurance, requiring homeowners to purchase additional coverage for these types of events. Both of these coverages can significantly increase the annual cost of an insurance policy.
• Insurance Deductibles. Even with homeowner’s insurance, most homeowners still have to pay a deductible when filing a claim, a cost that can be as much as $500 to $1,000 or more.
• Preventative Maintenance.
Unlike when renting a condo or apartment, where repairs and maintenance are often taken care of by the landlord, a homeowner assumes the responsibility of repairs and maintenance (painting, appliance failures, yard and pool maintenance, and the like), costs that can make a significant dent in one’s monthly budget. A way to soften the blow for homeowners is to consider a Home Warranty at the time of purchase. Home Warranties typically cover the major mechanicals of a home, including the appliances (sometimes considered option coverage), for the first year of ownership. Whenever a mechanical item or appliance fails, the homeowner would contact his/her home warranty company and for a small deductible the home warranty would cover the cost of repairs. However, coverage can vary dramatically between companies, so be sure to shop around and carefully read the fine print.
• Homeowner’s Association (HOA) Fees. If a homeowner purchases in a planned community development or condo subdivision, he/she will typically pay a monthly (sometimes annual) HOA fee for the maintenance and upkeep of the common elements. Common elements can range from a community pool to sports courts to landscaped parkways to golf course, etc. While these common elements enhance the beauty of a community, and often add to the value and desirability of a neighborhood, costs typically increase over time as the elements age. It’s also not uncommon for an HOA to float a special assessment to its members for larger capital improvements and projects; for example, painting and roofing projects. Special assessments can have a large impact on a homeowner’s monthly (or annual) budget.
• Garbage Collection. Again, in a rental situation waste services are often provided by the landlord, the cost of which is included in the monthly rental payment. However, for the homeowner, he/she will typically have to contract with a waste service provider for trash removal, recycling and/or green waste removal.
• Home Improvement Projects.
Most home owners take great pride in their purchase, and why not, since a home purchase is typically the largest purchase most people make in their lifetimes! As such, homeowners like to improve their properties over time – adding on or remodeling, revamping landscaping, installing a pool or spa, etc. Home improvement projects can be costly, but they can also add significant value to a property, as well as increase the comfort and enhance the livability of the property.
While these costs can seem a bit daunting, especially for first-time home buyers, they can be manageable with a little planning. Rachel Graf with Chase Mortgage Banking suggests that in order “to prepare for costs of home ownership, residents might consider creating an emergency fund equal to three months of their living expenses”. This type of savings plan can be achieved over time or perhaps by putting less down and retaining more funds for the inevitable costs of homeownership. Either approach should make the homeownership experience more comfortable and manageable over time.
Another option I discuss with my clients, especially when I used to work with a lot of first-time buyers in the Valley, is not to spend at their full qualifying level. For example, if a lender qualifies a buyer at a 36% debt to income ratio, the buyer doesn’t have to purchase at the maximum amount that he/she is qualified for. If the buyer purchases at a lower amount than qualified for, then this can leave extra funds for some of the expenses listed above. Furthermore, I would counsel first-time home buyers that they don’t want to be house poor in the purchase of their first property; i.e., they don’t want their house payment to be so large that all they feel like they’re doing is working to support the home, with little or no discretionary income to enjoy life . . . They would most likely end up resenting their home and the Realtor who sold it to them!
If you’d like to discuss financing options with an experienced lender, you may want to contact Shelley Martin at Suburban Mortgage at 602.751.8127 or visit her website at www.submort.com/shelleymartin. I’ve worked with Shelley for over 14 years and she’s helped both myself, family members and many of my clients with their mortgage financing needs.
If you’d like to know the value of your home, cabin, condo or land, please contact one of our Dominion Group Properties’ Real Estate Professionals at 928.468.3232 or visit us at our Bison Ranch office in Overgaard. Learn more about us at www.dgp-az.com or scan the QR Code to visit our website. We at Dominion Group Properties are your Rim Country Real Estate Professionals!
Source: 10 Hidden Homeownership Costs To Budget For; Rachel Graf, Chase Mortgage Banking; April 27,2015