Owning a Home: The Monthly Tally
It's hard enough reconciling yourself to the reality of paying the monthly principal and interest on a new home mortgage. When you realize all the expenses that will be added to that price tag, it can be a real shocker.
Bottom line: prepare yourself. Home ownership costs are bearable -- people pay them every day -- as long as you know what's coming. You may even want to scale back the size of the home you're looking for in order to bring the whole package in line with your budget.
Here's a list of potential monthly fees and expenses you'll encounter:
- Insurance. They won't let you complete the home-buying deal without it, so shop wisely. Homeowner's insurance, also referred to sometimes as "hazard insurance" on mortgage documents, provides basic protection against fire and theft. It does not generally cover flood damage; flood insurance is an entirely separate entity that you will be required to purchase if you live in a flood-prone area. HINT: Consider bundling your homeowner's insurance with your auto insurance to get a bargain price.
- Property taxes. You can't avoid these either, but consider them a good thing: pay them, and the fire department will come when you call. Depending on where you live, you may be responsible for both city and county property taxes; call your county property assessor's office to be sure. Local tax rates vary, but your home is typically taxed on its assessed value, an amount equal to a fraction of its appraised value, which is the number you're probably familiar with from the loan-securing process. Taxes can add hundreds of dollars to your monthly payment, and the figures on your good faith estimate may not be accurate, so find out the final number before you sign the dotted line.
- Private mortgage insurance (PMI). If your down payment is less than 20 percent of the mortgage value, you may have to foot the bill for PMI, which protects the lender against your defaulting on the loan. This can tack on as much as a couple hundred dollars per month, depending on the size of your loan.
- Homeowner's association fees. If you're buying into a subdivision or a condominium community, you may have to pay for the monthly upkeep of common areas and other shared expenses. Some HOA fees are paid yearly and are quite inexpensive; on the other hand, some Manhattan co-op fees run to four figures per month. Some states allow associations to foreclose on homes with unpaid fees, so don't treat them as optional. Find out if your state imposes limits on HOA power, including how much fees can increase per year.
- Utilities. If you're moving from an apartment to a home for the first time, know that the increase in square footage (not to mention water for a newly sodded yard) can pack a real punch in the form of a huge utility bill. Plan to implement some energy conservation measures, like light-blocking blinds and compact fluorescent light bulbs, to offset the tab.
- Maintenance. This won't show up in your mortgage payment, but it's no less real an expense. Be sure you have some monthly budget set aside for repairs and upkeep, whether for small do-it-yourself things like replacing floodlight bulbs or the inevitably serious issues that crop up from time to time (sure, the fridge looks fine today, but all appliances have life spans).
Remember, forewarned is forearmed!