The Costs of Owning a Home

Wanting to buy a home, and actually being able to buy one, can often be two different realities. You do not want to find yourself burdened by a long-term financial commitment without a penny to spare. And you certainly don't want to find yourself in your dream home, only to have the bank come take it away because you can't keep up with the expenses. Let's talk about the facts.

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Are you better off buying a home, or should you continue to rent?

Rent vs. Buy Calculator

Analyze your current expenses
Most new homeowners find that when they add up their total housing costs (the monthly mortgage payment, the cost of moving and settling in, immediate repairs and revisions, and the ongoing costs of taxes, insurance and maintenance), that these costs are not only a lot higher than they previously paid for rent, but a lot higher than they estimated they would be for owning a home.

If you currently rent, can you comfortably afford to pay each month more for housing than you currently do? Do you usually have some money left over at the end of the month for "fun things"? If not, you may need to change some habits before you can seriously consider buying a home.

If you have never planned a budget — instead you just successfully wing it each month — you may not have a clear idea of how you spend your money from week to week, or month to month. You may actually "make" more money than you realize when the numbers you have been dealing with are presented in a more calculated format. Write down your income and expenses. You will notice that some of your expenses are "fixed" expenses (such as car payment, taxes and day care), and others are "discretionary" expenses. You have considerable discretion in deciding how much or how little to spend in these areas (for example, a new canvas for your next painting, or a round downtown on a Saturday night).

Assess your lifestyle
To some extent, you must simply decide how important it is to own a home versus doing the things that you have become used to doing. Are you willing to put off some purchases or spend less in certain areas for a period of time? Perhaps you can "try out" the cost of homeownership by setting aside the amount you would be able (and willing) to pay over and above your current housing costs, and do this for several pay periods. If you find you can do this (and no cheating), you may indeed be able and ready for homeownership.

Again, you should not consider buying a home until you are confident that you can comfortably handle the mortgage payment and housing-related expenses that come along with the privilege of owning your own home. Remember, if you do not pay your mortgage payments in full each month, the lender will foreclose on you. It's that simple.

Down payment
Chances are, you will have to rely on a home loan (a mortgage) from a financial institution or mortgage lender to pay for the cost of buying your property. While not all mortgages require that you contribute some portion of your own funds (a down payment) as part of the deal, most lenders feel more secure knowing you have some of your own money invested in the house, because you are less likely to walk away from it. Traditionally, lenders expect buyers to make a down payment amounting to at least 20-percent the purchase price of the house. That means buyers in Pinellas County would need a down payment of at least $20,000 to purchase a modest home of $100,000. Fortunately, there are lenders who will accept as little as 3 to 5-percent down payment, provided the buyer purchases private mortgage insurance (PMI) to protect the lender in case the borrower fails to repay the loan. For many people, 3-percent of $100,000 is a much more manageable down payment.

Closing costs
Besides the down payment, homebuyers must be prepared to pay a number of additional upfront costs that will arise on the day of closing. Known as closing costs (further detailed in Chapter 4) these expenses generally range from 3 to 6 percent of the mortgage. For example, if you were to buy a townhome for $60,000 with a 5-percent down payment ($3,000), you could expect to pay between $1,725 and $3,420 in closing costs on your $57,000 mortgage.

Did you know?

You can get a mortgage that pays for more than the actual price of the house, if you intend on fixing it up.

There are special loans known as Purchase-and-Repair Loans that will provide you additional money on top of the purchase price of the home to help you cover the costs of repairs and renovations.

Settling-in costs
You should also consider what it will cost to move and settle into a new home. The costs of renting a moving truck (with insurance), packing materials, utility deposits — it can all add up. And if you buy a house that is in need of immediate repairs or revisions, you will need to have enough money left over after buying the home to make the repairs. The point is, you do not want to spend all of your money on buying the home. You will need some left over.

As a renter, your primary housing cost is the amount of rent you pay each month. As a homeowner, your housing costs will include your monthly mortgage payment, property taxes, homeowners insurance, utilities, maintenance, and perhaps even mortgage insurance if your lender requires it. Owners of condominiums and cooperatives should also expect to pay an additional monthly common area assessment (often called "association fees" or "condo fee") to cover the costs of maintaining the shared features of the condominium property.

Monthly mortgage payment
Since most renters are used to paying rent on a monthly basis, they are usually prepared to make monthly mortgage payments. Each mortgage payment includes both the repayment portion of the principle (the amount actually borrowed) as well as the interest (a percentage rate assessed for using the lender's funds). Lenders refer to payments of principle and interest as P&I.

The amount of your monthly mortgage payment depends on the amount you borrow, the interest rate, the repayment period (or "term"), and whether you have a fixed-rate or an adjustable-rate mortgage.

The above chart shows how the loan amount and the interest rate affect the monthly payment. As the chart demonstrates, the bigger the loan amount and the higher the interest rate, the larger the borrower's monthly payment. Most mortgages are fully amortized, meaning at the end of the repayment period (for example, 15 years of making the same monthly principal and interest payment), you will have paid the entire amount of principal and all the interest charged by the lender. The house is then yours, free and clear.

Taxes and insurance
In many cases, a homebuyer's monthly mortgage payment includes not only the amount required to repay a portion of the principal and accrued interest (P&I), but also an added amount for property taxes, homeowner's insurance and private mortgage insurance. The lender holds these additional amounts in a separate escrow account and then pays the tax and insurance bill on your behalf when they come due. It is in their best interest: they hold the deed, and if taxes are not paid, the government could put a lien on the property which would usurp the lender's right to the property. In this way, the lender ensures that these important annual expenses are paid on time.

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Estimate your monthly mortgage principal, interest, taxes and insurance payment (PITI) and amortization schedule.

PITI Calculator

Keep in mind: There are other variables involved in determining your housing costs, chief of these being your credit rating. An estimation calculator doesn't know your credit rating, until your mortgage counselor factors it in.

If the lender does not put into escrow an amount reserved for taxes and insurance, then you will have the responsibility of finding out the amount, and paying it yourself. You must be prepared to pay these bills when they come due, or the government may put a lien on your home.

Because taxes and insurance are an essential part of a homeowner's housing costs, lenders often refer to the components of a mortgage payment as PITI, an abbreviation for principal, interest, taxes, and insurance. Lenders also view condominium and cooperative fees as belonging in this category of basic housing costs.

Other ongoing costs of owning a home include the utilities (electricity, water, sewer, trash, gas, etc.) and maintenance costs. First-time homebuyers are often surprised by how costly basic upkeep is, both in terms of money and time. The cost of utilities may vary greatly depending on the season of the year. Electricity is usually more expensive during the summer months in Pinellas County, because that is when your air conditioner is working full-time. Also, if your property is located outside city limits, but within Pinellas County jurisdiction, you may have to pay for utilities normally paid by the city, such as trash service.

Repairs and maintenance often represent a considerable amount of unexpected expenses. As such, it is important that homeowners always have an available reserve on hand, either cash or credit. The choice of reserves is yours, but keep in mind: the cost of cash is principle, the cost of credit is interest.

The good news is that homeowners receive significant federal income tax benefits. Combined with the fact that Florida is a no-income-tax state, the costs of owning a home may balance out. Consult with a financing specialist to help you make sense of the numbers.

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