Hidden Costs of Home Ownership

When people think about the cost of home ownership, they are usually thinking of the cost of the home and maybe the utilities and, for some, HOA fees. Many of the other, and sometimes expensive, cost get overlooked until after the purchase.  Below are the most common costs to owning a home that you need to consider before purchasing.

Homeowners and Flood Insurance

For most homeowners, insurance costs are either completely overlooked (for worse) or conveniently glossed over. There are two main types of insurance that you will need when owning a home. Flood insurance refers to a particular insurance policy against property damage from flooding caused by a burst water pipe or other high-risk natural occurrence. It may not be expensive.  If you are in an area where flooding is not common, you may qualify for cheap flood insurance. To decide risk factors for certain properties, insurance providers will frequently refer to regional topographical surveys that denote low-lying areas, floodplains, floodways and other vulnerable locations. In these cases, the flooding risk is proportional to the proximity of the vulnerable flood zone to a residential area.

It is important to note that flood insurance is not intended to replace homeowner’s property insurance, which is designed to cover the loss of your belongings in the event of a disaster. Flood insurance helps protect your possessions, but it is primarily a secondary policy meant to help protect your other insurance needs. Homeowner’s insurance policies can also provide short term and long term assistance with replacement costs for your belongings, if you suffer a total loss of them during a disaster. Homeowner’s insurance policies are designed to offer a variety of protection and perks to customers in order to compensate for the significant financial burden caused by disasters such as storms, fires and earthquakes. It will replace the loss of your belongings in the event of a disaster. Although natural disasters do occur only periodically, they are not uncommon or unexpected.

Property Taxes

One other factor that can affect the total cost of Home Ownership includes property taxes. Property taxes can be included in your mortgage payment by being part of your escrow or paid separately. If you choose to pay them separate from your monthly mortgage payment, you will need to make a single large payment annually either at the beginning of the year or at the end, depending on the city in which you live. Local property taxes are based on the market value of your home and the tax rate for the city you live in. So, if your property taxes are high, that can add a significant amount to the cost of home ownership.

Mortgage Principle and Interest

Since we mentioned mortgages in the last paragraph, its worth going into a little further.  Obviously, a mortgage payment is a large part of the cost of owning a home, but what is it actually made up of? A mortgage is basically a long-term loan designed for you to purchase a property. The mortgage consists of two main parts: the principle and the interest. Principle is part of the loan that represents how much you actually borrowed.  For example, If you put $50,000 as a down payment on a home you purchased for $250,000, then the amount you’re borrowing, and therefore the principle, is $200,000 (250,000 minus 50,000). In addition to repaying just the principle, you also need to make interest payments on the balance of the loan. You’re monthly payment will also include interest.  Interest is the amount of money you are being charged for the bank or mortgage company to lend you the money to buy the house.  The annual percentage charged on the money you owe is call the interest rate.  That rate can vary greatly and will depend on the current interest rates set by the federal government as well as you credit score and other factors.

Home Maintenance

Then, course there is home maintenance. The cost of maintaining your home can be expensive. It will also vary greatly depending on the condition of your house as well as the size and its features. In general, you are supposed to shell out 1% of the overall value of your house per year for maintenance alone. So, if your house is worth $250k, you should expect to spend about $2500 per year, on average, to cover expenses for maintenance. Trying to skimp on these expenses can and will ultimately cost you more in the long run.