Renters have it pretty easy when they calculate their housing costs: add together your monthly rent, your utility bills and your renter’s insurance premium and you’re done. You may also want to include your security deposit, but chances are high that if you’re a good tenant you’ll get that money back when you move.
Initial costs of buying a home
While most renters focus on the need to accumulate funds for a down payment, there are other expenses associated with making the transition from renter to homeowner or from one home to another. You don’t need to pay a lender or a real estate agent any fees until the transaction is complete, but you do have to make some other payments, such as:
Ongoing expenses of homeownership
- Mortgage principal and interest. Your biggest ongoing expense will be the principal and interest (P&I) payment on your mortgage. Keep in mind that your P&I payment will stay the same with a fixed-rate loan, but can change if you opt for an adjustable rate mortgage.
- Property taxes. Your property will likely be reassessed annually by your city or county taxing authority, so you may find that your property taxes change over time, often edging upward. Many homeowners pay their property taxes in escrow – this means the lender collects for the actual cost of your property taxes in 12 monthly installments. The lender then pays the annual or semi-annual tax bill on your behalf. If you choose to pay your taxes on your own, make sure you’re setting aside money for the annual bill on a regular basis.
- Homeowner’s insurance. Lenders require you to have homeowner’s insurance to protect your home – and their collateral. Your insurance premium may be collected monthly as an escrow item included with your P&I payment. Homeowner’s insurance premiums are typically higher than renter’s insurance because you are covering the costs to replace your home or other structures on the land in case of disasters such as fire, wind or flood, in addition to providing liability and personal property coverage. Flood coverage may not be required, but if you’re located near streams, rivers, or in a valley, you could be subject to flooding. Review flood maps and costs of coverage with your insurance company.
- Homeowner association dues. If you live in a condo or a community with a homeowners’ association, you’ll also need to pay dues either monthly, quarterly or annually.
- Mortgage insurance. If you have a conventional loan and made a down payment of less than 20 percent, or have an FHA loan, you’ll need to pay mortgage insurance as part of your monthly payment.
- Utility payments. Before you buy a place, get an estimate of monthly utility costs so you can budget for these expenses. You may be paying more for utilities than when you rented, including a water bill, a sewer bill, and gas and electricity depending on where you buy.
- Maintenance costs. Maintenance costs vary according to the age, size and condition of your property, but in general, you should set aside one percent of your home value each year to cover maintenance costs. You may want to purchase a service contract, also called a Home Warranty, which may cover repair or replacement costs of your heating and air conditioning system, and other important components of your home.
- Renovation costs. If you plan to own your home for a long time or want to make some immediate improvements, it’s best to begin setting aside funds for larger renovation or repairs.
Keep in mind that your level of cash reserves for emergencies should be a little higher if you are responsible for maintaining a home, since you never know what issues could arise. On the other hand, you should be able to deduct the interest paid on your mortgage and your property taxes on your federal income taxes, which can offset some of the costs of homeownership. At the same time, as you pay down your loan balance and your home hopefully rises in value, you are building an asset for your future and living in a place you love.