Owning a home has long been part of the American Dream. It has proven to be a gateway towards building generational wealth and stability for millions of families. But owning a home does, in fact, come with certain risks and expenses that you would not experience as a renter. Some of these expenses are expenditures that you can count on every month, some of them are infrequent or irregular, and some of them may never happen to you. Let’s start with the stuff you can count on.
The first expenditure you can always count on with homeownership is property tax. Every property that can be owned as your permanent residence will have property taxes associated with it, whether you have purchased a condo, a townhouse, a single-family home, a multi-family home, or even a mobile or manufactured home. Property taxes vary widely based on your local and state tax codes. You can find out how much your property taxes or on your county assessor’s website, and you can always ask your lender or your real estate agent when you are purchasing your home. Most places reassess property taxes on a regular basis, such as every three years. At that time, your property taxes might increase, decrease, or stay the same. Most people pay their property taxes through escrow, which is an extra fee that your lender collects on top of your mortgage so that they can pay your taxes for you. If you do not have a mortgage, you will have to pay your property taxes yourself.
The next expenditure that you can always count on is homeowner’s insurance. If you have a mortgage on your home, your lender will require that you carry a homeowner’s insurance policy that covers at least the amount of your loan, if not the entire cost to rebuild your home should catastrophe strike. If you do not have a mortgage, it is still wise to have homeowner’s insurance as your home is likely one of the biggest, if not the biggest, single investments that you have. Homeowner’s insurance, like property taxes, is most often paid for through the escrow process. For example, your monthly mortgage payment, which includes the principal and interest on your loan, may be $1100/month. If your homeowner’s insurance is $600 per year and your property taxes are $1200 per year, your lender will most likely collect an extra $50/month to go towards your homeowner’s insurance and $100/month to go towards your property taxes, making your final payment come out to be $1100 + $50 +$100 = $1250/month.
The third expenditure we will discuss is something that many homeowners must pay, but not everyone, and that is HOA Fees. An HOA is a Homeowners Association and it is most common to find these in condo developments, townhomes, planned unit developments (often called PUD’s), and neighborhoods of single-family homes with shared amenities such as landscaping of common areas, tennis courts, a playground, a pool, etc. As you can imagine, HOA fees vary immensely depending on the sort of development you live in and the level of service provided by the Homeowners Association. Some neighborhoods have HOA’s as low as $10/month to cover expenses like simple landscaping of common areas, whereas other HOA fees can be hundreds, if not thousands, of dollars. The highest HOA fees exist in places where the Homeowners Association offers a very high level of service, such as a highrise condo development with multiple pools, fitness areas, elevator attendants, or on-site concierge services.
The next expenditure that is important to consider when purchasing a home is maintenance and repair costs. These are expenses that you would not incur if you were renting a property, but you now have responsibility for them because you are the homeowner. Maintenance expenditures can be very low-cost items such as changing out your air filters in your HVAC system every three months. This will probably cost you between $5-$15 each time you do it, so a total of $20-$60 per year. Other maintenance costs can be much more extreme, from water heaters to HVAC systems (HVAC stands for Heating, Ventilation, and Air Conditioning) to a new roof. Some of these big ticket items like a roof or HVAC system can easily climb north of $5000-$10,000.
The best way to deal with repair and maintenance expenditures, or any other expenditures that are irregular or unpredictable, is to build a budget for yourself. A great goal to set for yourself would be to save up 1% of the purchase price of your home every year in an account dedicated to home maintenance and repairs. That means if you purchased your home for $200,000, then you will want to save ($200,000 x 1%) = $2000 per year or $167 per month. This will start to give you a healthy buffer so that you are not set back by any unexpected repairs that come up with your home.