There’s always a lot of debate about the upside of buying a home.
The talk of buying vs. renting is always a big part of that.
But if you do decide to become a homeowner, you have to be careful.
There are costs involved.
Lots of them.
People concentrate on mortgage payments and real estate taxes but there’s much more.
You see, there are a bunch of things that you will be responsible to pay for aside from that.
They may not be buzzwords like “mortgage” or “property taxes”.
They may not even be significant individually.
But trust me, in the end, they add up to a nice chunk of change.
And, unless you are lucky enough to have a really good real estate agent or friend/family/coworker (or me!) to prepare you for any or all of these costs, you will have to find out the hard way–on your own.
You’re paying more than just a mortgage
When you go to contract on a home (whether it be a single family, townhouse, or condo) the main numbers discussed are mortgage payment and closing costs.
You usually only worry about getting your credit in line so you can get the lowest interest rate and have to bring the least amount of money possible to the table at the closing and being able to come up with that money, naturally.
Unfortunately-and this usually happens to younger, first time home buyers-what you don’t normally hear much about are the costs property owners have to deal with sometimes far off into the future.
Costs that no one warned you about.
Costs that don’t get the attention they should from bloggers and industry experts.
No one wants to be the home on the block to stand out for “negative reasons”.
Most people want to fit in with the neighbors and project similar, if not a more lucrative lifestyle so they will do whatever it takes to keep up appearances.
Putting in a pool, getting a crew to design a beautiful landscape, putting a full entertainment center or outdoor kitchen on the patio all will cost you significantly.
It doesn’t end with just the cost of installation, however.
You also have to keep in mind the increase in the home’s assessed value when it comes to real estate taxes, not to mention the increase in your utility bills as well as continued upkeep.
Even if you do some of the things yourself, the time and work needed at any time is time that you don’t have to actually enjoy any of that stuff.
If you take on a mortgage, more likely than not, you will be forced to take out an insurance policy with certain minimum coverages.
Then, you have to obtain other insurances based on your location (ie: flood or wind zones) that may require secondary policies if your primary provider doesn’t offer such coverages.
Of course, it is also an integral part of financial planning to have your investments and other personal items, particularly valuables and/or family heirlooms insured in case of unforeseen events, but it is also not something that is talked about much when the discussion comes to buying a home.
Things won’t always turn out as you expect them once the purchase process is complete.
You may realize that your furniture just doesn’t fit the way you envisioned when you did your walk-through.
Appliances may break, even if they are reasonably new.
You may do some damage when moving into the home.
Stuff happens, but sometimes we don’t plan for it or even consider the possibilities of it happening, and they generally don’t happen just once.
It’s important to understand all of the various mishaps that can occur and be able to handle them financially.
Having an “emergency fund“, or whatever you want to call it is a good start.
Just understanding the fact that these kinds of things can take place will put you ahead of the curve in terms of not being completely taken off guard and scrambling to figure out what to do next.
Homeowners or Condo Association Fees
Again, this depends on where you live.
homeowners association sets the rules by which you will have to abide by, and you even get to pay them to do so!
And, that’s generally on our mortgagee payment unless the community you buy in has some sort of escrow requirement that the lender works into your payment.
Many communities have associations that require monthly or quarterly dues to pay for common areas such as pools, clubhouses, parks, and facilities.
They also cover the landscaping, security, and possibly certain utilities if the community has a contract with the cable company for example.
These associations set guidelines such as the colors that exteriors can be painted, parking rules, and “policing” the properties in order to maintain the property values by ensuring that the landscaping is done, roofs and sidewalks are clean, and lots are kept up to standard.
Every home needs up keeping, whether it’s replacing appliances, air conditioning maintenance, pest control, landscaping, whatever.
If you live in an area that has an association, certain things are likely to be required, such as the landscaping and power washing of the roof and sidewalk (as mentioned above).
Some people will say that it’s more financially prudent to take a do it yourself approach, but it is always best to hire a professional if:
- You have no experience in doing something like climbing onto a roof with a pressure washer, or
- Your time is better spent on other tasks and a professional would get the job done in a more efficient manner.
It isn’t always about the money outright, but a combination of the money and the opportunity cost of doing things yourself.
Not to mention the health risks posed by trying to use power tools you have never touched before in your life or attempting to handle electrical work when you have trouble tying your shoes.
This one is iffy, which is why it’s down at the bottom.
Many times, especially if you aren’t putting down 20% the mortgage company will demand that you pay a portion of your annual property taxes each month as part of your monthly mortgage payment.
If that is the case, you are already aware of the costs because they will tell you when you are presented with your mortgage offer.
However, if you are not having your property taxes escrowed, you may be in for a shock come late October when most bills go out unless you did your homework.
It’s relatively easy to research the property taxes in your desired area, but that just isn’t one of the things that most first-timers consider unless they are well prepared and taught to do so.
There’s also another problem that never gets mentioned…rising home values.
In general, that’s a great thing because it increases your “paper equity”.
The downside to that, however, is the increased property taxes that coincide with valuation increases.
You’re going to have to account for those increases in your housing costs too, which can be substantial in some areas.
Not everything is deductible
Now, one of the biggest reasons to own a home used to be big tax deductions.
Mortgage insurance premiums.
Real estate taxes.
People started getting it in their heads that everything they paid in conjunction with home ownership was a tax deduction.
However, those are the only expenses that are allowed as deductions.
Insurance, maintenance, association dues, pmi…none of these are deductions to homeowners who occupy their homes.
A kitchen or bathroom remodel is not deductible.
You don’t get to take depreciation on your primary residence either.
Even tax credits for installing a high-efficiency air conditioning unit aren’t available anymore.
Buying a home can be a very confusing and overwhelming even for even the most organized and prepared person, let alone someone who has never gone through the process before.
Even if you have reliable people helping you out, it can still be a hectic process and one which you may want to just get over with.
The key is to arm yourself with the most knowledge possible and to take things one step at a time regardless of how slow it may feel like the process is going.
It is better to know exactly what you are getting into beforehand, rather than make the purchase and then discover additional costs here and there as time passes.
Just remember, renting a home is still a very viable and responsible option as well.
If you aren’t ready to be a homeowner, or you’re not sure that you can account for all of the costs involved in owning a home without stretching each paycheck to its limit, then don’t.
Buying a home when you are ill-prepared or not financially ready will certainly leave you “home rich and cash poor” or worse yet, completely broke.