Dear Readers: I get a lot of questions regarding the costs of owning a home, typically about saving for a down payment or paying off a mortgage. But homeownership involves numerous other costs that can impact your budget. So as the spring homebuying season gets underway, I thought it would be a good time to step back and look more closely at the ongoing financial realities. Here are seven additional costs every homebuyer should be aware of:
1) Private mortgage insurance. If your down payment is less than 20 percent, your lender will most likely require that you carry private mortgage insurance. Premiums vary depending on the size of your down payment and your loan. Your lender can tell you how much the PMI premium will increase your monthly payment — and for how long. When your loan-to-value ratio reaches 80 percent, you no longer need it.
2) Property taxes. Property tax rates vary from state to state, even by county or city. To get an upfront idea of the tax rate in your location as a percentage of home value, check an online resource such as Tax-Rates.org. (One bright spot: Property taxes are deductible on your federal income tax return, subject to alternative minimum tax adjustments.)
You can also compare tax rates across the country. For instance, New Jersey, Texas and Nebraska have some of the highest property taxes; Hawaii, Alabama and Louisiana have some of the lowest. How much your property taxes can be raised from year to year also varies depending on your location.
If you carry PMI, your property taxes may be included in your monthly payment; otherwise, they’re due twice a year.
3) Homeowners insurance. This is not a place to cut corners. If you finance your home, your lender will require a minimum level of insurance, but to really protect yourself, it’s important to insure your home’s replacement cost, not its current market value. In other words, you need enough coverage to rebuild your house in case of a disaster.
Also understand that damage from a flood or an earthquake is not covered by standard insurance; you need a separate policy to cover these. Water damage is especially tricky. Most general policies cover damage from such things as a burst pipe or a leaky roof. But only flood insurance will cover damage from surface or underground water.
Liability insurance is also a must in case someone is injured on your property. You may also want to purchase an umbrella policy for additional protection.
Finally, don’t make the mistake of believing that all insurance companies and policies are the same. Before you purchase a policy, it’s important to do some comparison shopping for pricing, as well as research on consumer satisfaction. J.D. Power’s website and Insure.com can provide basic information and ratings.
4) Association fees. Are you buying a condo? Is your home part of a community that includes extras — things such as a pool, recreation facilities and grounds maintenance? If so, you may have to factor a monthly condo or homeowners association fee into your budget.
5) Major repairs. If home inspections are a condition of purchase, you may be able to negotiate major repairs with the seller. But be realistic about repairs down the road. Will you need to replace the roof? Repaint the exterior? What about windows, doors or the deck? When the house honeymoon is over, these things may seem more serious — both aesthetically and financially.
6) Routine maintenance. Even if you’re not hit with major repairs, a home requires regular yearly maintenance. You’ll hear rules of thumb that suggest you budget 1 percent of your home’s value or $1 per square foot annually for maintenance. Though it’s fine to have a benchmark, the amount of actual yearly maintenance depends on factors such as the home’s location, weather, the home’s initial condition and the age of the home.
Costs will vary by year, depending on what needs to be done, but best to be financially prepared. Keeping your house in good condition helps maintain not only its appearance and functionality but also its value.
7) Upgrades. If you’re buying low with the idea of doing lots of improvements, start planning for those now. Whether it’s a new kitchen, a remodeled bath or an added room, the costs can be substantial; it’s best to know the price tag upfront.
Ways to Cover the Essentials — and the Extras
The first thing I suggest is to include monthly deposits to a home maintenance fund in your budget. (This is above and beyond your emergency fund, which covers you in the event of job loss or illness.) Setting aside a monthly amount is the easiest way to ensure you’ll have the money for repairs and maintenance when you need it.
You might also look into a home warranty if one wasn’t included in your purchase agreement. This generally covers repair and replacement of appliances and other in-home systems. Annual premiums vary, as well as fees for service calls. Again, best to comparison shop.
Another option is a home equity line of credit — especially for larger expenses, such as a roof or a kitchen remodel. To qualify, you’ll need at least an 80 percent loan-to-value ratio, as well as low debt and good credit. But if you qualify, a HELOC offers several pluses: You have immediate access to the money; you only pay interest on the money you use; and interest payments may be tax-deductible.
Owning a home is an ongoing financial commitment, so dig into the details before you buy. Knowing upfront what your expenses may be — and planning for them in advance — will help keep your dream house from becoming a financial nightmare.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at email@example.com.