The Hidden and Otherwise Overlooked Costs of Buying a Home
If you’re renting now and, like me, have grown very, very tired of it, you’re thinking of buying a home. Today's low interest rate and low prices are exciting, and we can’t help but think “hey, I can totally afford this!” But can we? In order not to end up like one of the myriad defaulting homeowners of 2011, we need to know what it actually costs to buy a home. And so, ZipCode brings you:
Not So Hidden, but Certainly Oft Overlooked, Costs of Homeownership
Without thinking it all the way through, we might consider buying a house almost cheap right now. Example: Take the national median price for a home in October of 2011: $212,300. Now say you and your partner are renting a 2 bedroom apartment at $1000 a month and pay an additional $15 for renter’s insurance. Sick of it, you want to buy a home priced at this national median. Simply put, if you can slap down a 20% down payment (and really, if you can’t, you may not qualify for a loan at all these days, since –not always, but increasingly often—banks want that security before they’ll accept your application), and you can snag the current low 4% interest, your monthly payment (principal with interest) would be $810.
What? Pop the champagne! You can save money buying a home!
But wait. We need a ZipRealty mortgage calculator to check our facts. We can’t forget about property taxes-- which vary from state to state, city to city, even street to street-- but generally, homes are taxed at least 1% of their assessed value. So assuming your home is appraised for what you paid for it, the interest for the year would be $2123.
Next, let’s add in obligatory home insurance. Here too, the average rate for home insurance varies wildly depending on a) the size of the home and b) the location, and c) the type of coverage (i.e. earthquake coverage in San Francisco? Flood coverage in New Orleans?). But in 2011, the average premium for one year of home insurance was approximately $725-$760, so let’s say $750.
So let’s add in taxes and insurance. What’s the premium now?
Total monthly: $1050. Okay, so it’s a little more than your rent. And we’re not done yet. Because property taxes and insurance, though perhaps not always considered right away, are hardly surprising. Let’s also look at the more hidden costs of home ownership.
Purchase and closing costs
In order to take possession of a new home, we have to pay closing costs. These come in two categories: those that you spend on the loan, and those that you pay on the house: going to have closing costs. Some of these are part of buying the home itself; others are part of taking out a mortgage. Loans, for instance, include origination fees, which is what t the lender charges up front for extending the loan. We may also want to buy down some interest at the loan’s inception, although with such low interest these days, we have less reason to do that. On the home itself, we’ll pay for home inspections, appraisals, and transfer taxes.
Very roughly, you can expect an additional expenditure in the range of 2-4% of the purchase price on purchase costs overall.
And note: the new figure we’re trying to come up with so far precludes private mortgage insurance interest (which you will pay if you can’t come up with 20% down) and any additional interest charged by an organization such as the FHA if your loan comes from that program.
Another note: we aren’t even trying to figure in an HOA fee, the homewoners dues that come with most condos townhomes and co-ops sharing property. We skipped them here because they require a whole new set of calculations, and are better off dealt with in anther blog. But for now, keep the HOA in mind if you’ve got your heart set on a condo.
Move in and maintenance
We all know moving is expensive and if we’re over 25 years of age, we’ve probably already maxed out our opportunities to convince friends and family to help move us for nothing more than pizza, beer, and good will. Particularly with out-of-state moves, the expense can be formidable.
And finally, utilities and maintenance. In most situations, renters pay at least some utilities. In my case, my husband and I pay them all, and the home has not been weatherized or updated since the 1940s. It runs off an underground oil tank, so our heating bills are insane. Clearly then, we won’t spend much more than we do now on utilities when we buy a home because we’re committed to energy efficient appliances and construction in the place we eventually buy. But some renters aren’t used to paying for water or sewage or trash. Those expenses need to be figured into your monthly as well.
Maintenance is another issue, and a much bigger one. Usually when rented houses break down, the onus falls to the owner/landlord, not the tenant, to pay for repairs: Great for tenants. If you’re the owner though….. well, you see where I’m going with this.
So Why is Buying a Home such a Good Investment?
First of all, we renters are well aware that the money we spend on rent, on fixing up our rented home, on beautifying our rented yard: all of this is money down the drain. With a home though, we build equity. If we are willing and able to live in our purchased home lon enough (for an average of 7-10 years), we can expect that equity to appreciate. Can you expect your rent money to appreciate in any way, ever? Not a chance.
On top of the equity, we’ll get mortgage tax credits, something we never had as renters. Here’s what that advantage looks like, courtesy of Investopedia:
An individual or family with a 30-year 7%, $400,000 mortgage would pay $4,063 in principal and $27,871 in interest in the first year of that mortgage. If they were in a 28% tax bracket, their tax savings would be $7,804 (.28 x 27,871 = 7,804). Private mortgage insurance (PMI) [for those buyers who did not put down 20% or more of the purchase price] may also be tax deductible for many Americans.
Can We Get a Clear Month-by-Month Comparison?
In a word, yes—but not here. If you know what you want to buy, you should also know the price range you’re planning to shop in. And, you should also know that locations tax rates, insurance rates, and the kind of monthly output expected for maintenance and utilities. Since this is so individual, ZipCode can’t do that for you, but a ZipRealty calculator can. So, for any home for sale that strikes your fancy, get serious. Use a rent vs. buy comparison calculator, weigh in your long term goals and think hard about what would really work best for you and your family’s happiness and financial solvency.
Because when you’re sure you can afford to buy, you have a confidence you can’t get without doing a little homework, and with that confidence, the best chance at a successful and relatively stress-free home-buying process. Luckily, Zip has the tools you need to get started.