Being a homeowner is both a dream and a responsibility. It can sometimes be difficult to calculate the cost of home ownership. The basics of a mortgage payment are mostly straightforward, and loans and terms can be calculated with a mortgage calculator. But, any homeowner can tell you that caring for and maintaining a home takes more than just that. Homeownership isn’t only about paying your mortgage. It’s also about home improvement costs, insurance, and taxes. Every month you’ll have to pay for your home in various ways. Here’s what goes into the real cost of home ownership.
Homeowner’s and mortgage insurance
Just like with your car, your health, and your life, having a home requires insurance. Homeowner’s insurance protects your home against damage, catastrophes, and theft. Very often, lenders will require borrowers to purchase homeowner’s insurance, and rightly so. The calamities that homeowner’s insurance protects against are the types of events that can ruin lives and homes, so having that protection is a responsibility that nearly every homeowner takes on.
Mortgage insurance, on the other hand, is a very different beast. If you are not able to put forward at least 20 percent of a home’s value as a down payment, you may have to pay a monthly fee in the form of mortgage insurance which protects the lender in the event of default. Mortgage insurance is typically associated with government-backed loans, such as FHA or USDA loans. Luckily, mortgage insurance is something you can get away from if you refinance your home later on down the line.
Maintenance and home improvement
Owning a home means maintaining a home. There’s no hard-and-fast way to determine or predict how much you’ll spend every year on maintenance, but there are two common rules for giving yourself a rough prediction of what it will take to maintain your home.
The first is the one percent rule, which states that homeowners can expect to pay, on average, about one percent of the value of their home in maintenance and improvement every year. The other is the square foot rule, which estimates that each square foot of your home takes about one dollar annually to maintain.
These rules are common, but neither of them are strictly scientific. When you purchase a home, calculate your upkeep using both the one percent and the one dollar rule so you have two different ballpark estimates to work from. Also, you’ll need to take into account the specifics of your home like its age, location, and condition. Don’t be afraid to ask your broker for their input. They’ve probably estimated those costs several times before, so take advantage of their expertise.
If you’re living under a roof, you’re paying property taxes; even if you are a renter. For homeowners, property taxes are direct and unavoidable. Property taxes vary from region to region, and can be as much as 2.35 percent of a home’s value (like they are in New Jersey, which has the highest rates in the country) to as low as 0.27 percent (the rate in Hawaii, which has the nation’s lowest property taxes). Unlike mortgage rates, down payments, or monthly payments, homeowners don’t really have much control over their property tax rates.