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 home-buying season gets underway, I thought it would be a good time to step back and look more closely at the ongoing financial realities.
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 likely require that you carry private mortgage insurance (PMI). 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 state-by-state, even county-by-county or city-by-city. To get an upfront idea of the tax rate in your state and county 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 (AMT) 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 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 things like a burst pipe or a leaky roof. But only flood insurance will cover damage from surface or below ground 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. Websites such as insure.com or jdpower.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 such as a pool, recreation facilities or 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. While it's fine to have a benchmark, the amount of actual yearly maintenance depends on factors like location, weather, initial condition and age of the house.
Costs will vary year-by-year, depending on what needs to be done, but best to be financially prepared. Keeping your house in good condition not only helps maintain its appearance and functionality--it helps maintain 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 (HELOC) -- especially for larger expenses like a roof or 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.
Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
This article originally appeared on Schwab.com You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. (MEMBER SIPC.) (0315-1634)
