Home ownership: what does it really cost?

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Ask a Lender
December 7, 2017


Key Points

The many costs of home ownership

  • Purchase costs: down payment, home inspection, closing costs
  • Ownership costs: mortgage, insurance, taxes, utilities, maintenance, sunk time
  • Opportunity costs: investment, mobility

It’s the first of the month again and you file your rent check, lamenting “I could pay for a house with this!”

But could you, really?

Simply calculating rent toward potential mortgage payments covers only one aspect of home ownership costs. Owning property comes with myriad expenses both fixed and variable, predictable and volatile. If you’re considering whether to rent or buy a home, understand the real cost of home ownership in terms of purchase, ownership and opportunity costs, before you make a decision.

Home purchase costs

Start from the beginning: the actual cost of buying a house. There’s the purchase price, of course, but there are also associated closing costs that add up, including but not limited to:

  • Down payment, typically 5 percent to 20 percent of the purchase price
  • Home inspection
  • Origination, home appraisal and other loan fees
  • Title search and insurance fees
  • Taxes and government fees
  • Realtor and legal fees, typically paid by the seller but sometimes split

Home ownership costs

If you have a mortgage, you are responsible for your monthly payment. When you take out a mortgage, the lender does the math to come up with what you’ll pay each month over the course of your loan – generally 15 or 30 years. That payment takes into account the cost of the home, closing costs, interest rate, and potentially other costs associated with buying the home, such as contingency deals you may have made with the seller. You’ll also pay private mortgage insurance if you have less than 20 percent equity in your home.

Your payment most always includes the principal, interest, taxes and insurance, referred to as PITI. From what you pay, the principal goes toward repaying what you borrowed and the interest goes to the lender. The money for taxes and insurance is put into an escrow account until those bills are due. Your mortgage holder makes those payments for you.

No mortgage? Your home still isn’t free. Ongoing fixed and variable costs include:

  • Homeowners insurance
  • Supplemental insurance such as earthquake or flood coverage (required in some areas, but optional for others, depending on the home’s location)
  • Property taxes, which will often increase and rarely decrease
  • Homeowners association (HOA) fees, which may increase over time. Not every home is in an HOA-controlled development
  • Utilities, including power, water, gas, garbage and septic services, depending on your home
  • Maintenance and repairs, statistically about 2 percent of your home value every year
  • Landscaping and yardwork
  • The time to maintain the house or the cost to hire that work out

Don’t forget the future cost of selling the home, as well. Realtor fees, seller concessions and potential tax dings – it costs money to sell your property too.

Opportunity cost

Although difficult to quantify, another expense of becoming a homeowner is opportunity cost — that is, what you give up as a result of owning a home.

Lack of mobility 

Owning a home is a geographic commitment that impacts your opportunities for employment, transportation, shopping and entertainment. You are beholden to economic impacts of which you have no control, but can cost you. Think of rising — or falling — property values, or increases in property taxes. If a new highway is built close to your home or someone buys your neighbor’s lot and builds up over your view, you have little recourse save for selling the home.

Missed investment opportunities

A primary residence should not be considered an investment. Home values typically just keep pace with inflation and, in the long run, usually don’t perform as well as a securities portfolio. Renting and putting discretionary income into strategic investments can generate far better returns than buying a home. If you buy a home, and your discretionary income is going more toward painting the bedrooms or emergency repairs, you may not have the extra funds to put toward securities or other investment opportunities that may come up.

Don’t be spooked

Home ownership can be expensive, but that’s not to say you shouldn’t buy. For many people, being a homeowner offers emotional comfort that surpasses any financial returns. If you want a stable place of your own, where you can start a family and live into your retirement years, owning a house may be a wise option.

Take care to identify how much home you can afford and find a property less expensive than that figure. You don’t want to end up living paycheck to paycheck after taking the largest mortgage you qualify for without accounting for ancillary spending. Owning a primary residence can never be cost-free, but the expenses are worth it for many happy homeowners.

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