The True Cost of Owning a Home

There is an ongoing discussion about whether or not buying and owning a home is a really a good idea. I have been a homeowner myself continuously (with just a small blip on that screen while I recovered from my divorce) since 1976 and that’s roughly 40+ years, so I can testify that owning your own home has been a great move for me. That’s why I wrote about it several times (most recently with “Damn Those Skeptics: Owning a Home Does Build Wealth” in January 2018) and said it is definitely a good thing.

The cost of owning a home can be more significant than it first appears. If you're a renter, you may be in for a big surprise when it comes to ownership.

But, and here’s the big but, maybe not for everybody! Why? There is a list of reasons as to why home ownership may not be the right decision for you, but one of the most underestimated and overlooked is understanding:

What is the real price of owning your own home?

Do You Dream About Owning a Home?

In middle-class America, home ownership has been one of the most significant rites of passage to adulthood. That certainly is the mindset that I grew up with, and even though my parents never achieved financial independence and lived a pretty modest lifestyle, they sought and achieved home ownership.

It wasn’t exactly the picture of 1950’s “Leave It to Beaver” suburbia home ownership that many of my generation saw and grew up with on TV, but it was still a home—albeit a brick and mortar row home located in a very congested portion of Northeast Philadelphia on a street that featured dozens of other “homes” that looked exactly the same as ours! But that was the point, it was ours, we owned it and it was the dream fulfilled!

Recently, some of my family members were discussing buying a home and I sat and listened without chiming in too much on the subject. One thing I have learned is that despite the fact I think I can offer some sage advice about most financial matters, when it comes to family or friends, it sometimes is better to stay out of it or at least venture no further that the edges of what they are considering unless you are asked for your opinions. This wasn’t the case.

So these “former homeowners” (who had been owners before which ended in a short sale) were now ready to try it again. Their dreams of owning their own home were still alive and well!

The Upside of Renting

When to rent and when to own? The rent-or-own decision goes beyond just minding your money. What are the reasons you might want to rent in 2019? They can include:

Mobility

Do you need to be able to move to a new city for career advancement? It gives you greater flexibility.

Saving Money

Today’s generation is delaying having children and have to pay off big student debts. Not owning allows you to pay off loans and save on your housing costs to do it. It also gives you more discretionary income to spend on “experiences” and not on concrete things like a backyard.

Uncertainty

Price appreciation can be elusive and dependent on your local real estate market. Home equity is never guaranteed, particularly over the short term. It’s probably a good idea to forget the old “your home is an investment” thing.

Of course there are certainly plenty of perks to owning a home. But there are also a sizable number of scary drawbacks—especially if you take out a mortgage you can’t comfortably afford or even worse, your income is somewhat unpredictable or your work history is a little sketchy and your finances are less than responsible.

The Upside of Home Ownership

Despite the challenges of overcoming the hurdles to home ownership, it is a worthy goal. But it does require a little education and some wise, practical decision-making that shouldn’t just be jumped into headfirst. The case for buying though does features real significant pluses like: the home actually is yours.

A sense of ownership is one of the best aspects of purchasing a home. You don’t have to answer to a landlord who won’t let you paint your walls, install a new fridge, or remodel. When you own a home, you do what you want when you want (with the approval of the town authorities, the homeowners association if applicable, and within legal limits).

Some of the other benefits of home ownership include:

Tax Benefits

Even with the recent changes in tax laws, home ownership can save you money. When you own a residence, the interest you pay on your mortgage is tax-deductible. You can also take a federal tax deduction for real estate taxes paid during the year (up to a certain limit). There are also capital gains tax exemptions if your residence increases in value and you eventually sell it again (there are rules and you need to comply to get this advantage).

Build Equity and Wealth

It’s true that home ownership isn’t the foolproof investment strategy as it seemed for those who bought and owned from the 1980’s through about 2007. Those who bought late saw their property wind up selling for a major loss—or worse, foreclosed upon.

However, the other option—spending money on rent—has no investment potential at all. Ownership, despite its risk, at least carries the possibility of return on investment.

One of the most important things to remember is that you’ve got to buy a house you can actually afford in the first place! That was and still is the mistake that so many people end up making.

What Can Happen When You Make a Big Mistake?

Big closets, hardwood floors, and garage space are all great, but they mean absolutely nothing if paying for them leaves you flat broke at the end of each month. That’s called being “house poor” and occurs when you spend a disproportionately high percentage of your income on mortgage and house-related costs.

Imagine sitting in your gorgeous 3,000 square foot home eating ramen noodles every night and you’ll get the picture. There are so many additional costs to home ownership that you must deal with once you are actually an owner that you just may not have ever considered if you only have a history of being a renter. You just cannot make the assumption that having the down payment and being abled to “afford” the sale price of a house equate to being able to live in it for the long term.

The truth is that a home—whether it’s your first, second, or third—has to fit into your real financial situation and you can’t always depend on a mortgage lender to make sure that you are exercising good judgment.

The Downside to Home Ownership

Many people grossly underestimate the actual cost of owning a home. Here’s a list you must keep in mind including the obvious:

The Down Payment

The gold standard for a down payment is 20% of the purchase price. On a $250,000 house, that means you need at least $50,000 cash. Do you have it? Prior to the 2008 recession, many lenders would let you get away with a much smaller amount however, today almost all lenders require private mortgage insurance (PMI) if you’re making a down payment of less than 20% of the purchase price. That means that you are paying “extra” every month on your bill.

Your Closing Costs

When you pay out a whopping down payment, hold your breath, because there’s more. You also need to show up at closing with an additional chunk of cash to cover certain costs payable to the lender and other parties. These “closing costs” typically include title insurance, fees for title search, appraisal, underwriting, survey, and loan origination fees often running into the thousands (you can roll these into your new mortgage but that means you will be paying for those fees with interest for up to the next 30 years!).

Is it just a “Mortgage Payment”?

Unless you managed to buy your house with cash, you’ve got to contend with a mortgage payment each month. Several factors contribute to that payment.

First, there is the principal. This is the amount of money you borrowed to finance your home. With a $250,000 house, assuming you made a $50,000 down payment, you would owe $200,000 in principal.

Then there’s the interest. Interest is the fee that lenders charge in exchange for the loans they give you. Mortgage interest rates fluctuate wildly, but currently they are around 4-5% for a conventional 30-year fixed loan, again assuming a 20% down payment. Add that on for the next 30 years.

And then there’s the property tax. Your local government levies taxes on your property in order to cover snow plowing, street maintenance, tree maintenance, government administration, police, fire department, and other city services like public schools, libraries, and parks. And this is a cost that tends to only go up over time. These days, lenders generally require borrowers to pay their taxes into an escrow account.

Your mortgage payment may also include homeowners insurance which, like property tax payments, is deposited into the escrow account. Different from the private mortgage insurance, homeowner insurance policies cover theft, vandalism, fire, and weather damage. Floods and earthquakes tend to be excluded from standard policies. For a $250,000 house, $1,500 is a realistic estimate for annual homeowners insurance.

And then there’s the private mortgage insurance (PMI). Your bank is likely to require private mortgage insurance if you make a down payment of less than 20%. Private mortgage insurance helps protect the lender by covering your obligation if you default on the loan.

But That Is Just The Beginning

Owning and maintaining a home brings plenty of expenses along with it like utilities. If you’ve ever rented, you’re accustomed to utility bills. However, chances are some of them were built into your monthly rent. As a homeowner, you’ve got to pay for all of the following: electricity, gas, sewer, water, trash, and recycling. And there’s still more. There’s snow removal and lawn care, plus cable TV (or streaming services) and internet, too.

Plus a lot of things can go wrong with a house. The furnace can blow up, the water heater could break down, pipes can burst, an HVAC system can go haywire, and your electric system may not be up to code (hopefully you paid for a good home inspector before you bought the place). Plus, your roof might leak, your chimney might crack, your insulation could be insufficient, and your toddler might draw all over the walls in permanent marker. And there is just routine maintenance like when I had to buy a new front door and storm door three years ago and they set me back almost $3,000!

As a renter, you simply call your landlord when something breaks down or goes awry. But when you own, the buck stops with you even when you have homeowners insurance. It doesn’t cover routine maintenance like mold, sewer backups, or termites, just for some examples.

Even if you have insurance, you’re going to end up paying a deductible when you make a claim, and your rates may increase as a result. To hedge against such things, everyone needs to keep a substantial cash reserve (emergency fund) to cover additional maintenance costs, both routine and unexpected. As a rule of thumb, repairs and maintenance account for 1% of the purchase price per year. On a $250,000 home, that means spending $2,500 per year just on repairs and maintenance. And that’s if it was well-maintained when you bought it. If you know there are issues going into the sale, you will have to plan on spending more.

Final Thoughts

I still fully support the dream of owning your own home and building wealth by doing so—but it may not be for you or for everyone. There are red flags that will tell you whether or not it’s a good idea for you and your family.

If you don’t have the money for a down payment or if you don’t have an income to pay the required add ons or the maintenance, improve your earning situation so you can then buy and afford it if you so choose. But don’t go into home ownership if you don’t have the savings and income necessary to make it work for you.

If you approach home ownership cautiously, not impulsively, you put yourself in a much better position to make a wise decision.

Do you own a home? Do you want to own one? If not, why not?

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