Many people who pay hundreds or even thousands of dollars each month on their rental home dream of becoming home owners. Using the rental money to pay for a mortgage is a much better alternative. In some cases, your monthly mortgage payments will be the same as your rental payment, but many home buyers fail to understand that there are many other costs associated with home ownership besides the mortgage payment. In reality, owning a home will usually cost more than renting, but it also has its advantages.
Especially when prices and interest rates are low, most people tend to overlook the majority of costs associated with owning a home, only looking at the monthly payment. The temptation to become a home owner can be very strong, especially for those who have been living in a rental for a while and have gotten married or are ready to start a family with children. In this article, we will take a look at how much it actually costs to be a home owner and which factors will influence these costs.
One Time Costs
Unlike renting, buying a home can have a very high initial cost. Unless you qualify for a no down payment mortgage loan, here are the costs associated with buying a home:
- The down payment. Most conventional mortgage loans require a 20 percent down payment, or you will be forced to purchase private mortgage insurance, which can be very expensive. The higher the down payment, the lower your interest rate and loan value will be, meaning that your monthly payment will also be lower.
- Closing costs. Closing costs can be as high as a few thousand dollars, and must never be overlooked when applying for a mortgage loan. Some lenders allow you to finance the closing costs into the loan, but that will make you monthly payments larger and require you to pay interest for the closing costs.
Monthly and Annual Costs
The largest cost of owning a home will be your monthly mortgage payment, which will be higher or lower depending on several factors. Besides the obvious monthly mortgage payment, there are several other costs that you should be aware of when trying to find out how much home ownership will cost you.
- The Homeowners Association (HOA) fee. Depending on what type of home you purchase, you might have to pay a monthly HOA fee. This fee generally covers insurance, maintenance and garbage services, but can also cover higher-end amenities, such as pools or fitness centers.
- Property taxes. Property taxes are based on how much your property is worth and its location, and are generally paid annually. Property taxes are paid to the municipality or town in which you reside, and are due even after you have paid off your mortgage.
- Homeowner’s insurance. This type of insurance is also based on the location of your home, its size and value. Other factors which may have an influence on how much you will be paying in homeowner’s insurance are your home’s age and if it’s located in an area where floods or hurricanes are common.
- Utilities. Gas, water, heating, electricity are some of the utilities that may have been included in your rental payment. When owning a home, you will have to pay all utilities each month, and that can prove to be a burden, depending mostly on your home’s size. For example, heating a small apartment can be very cheap compared to heating a two-story house.
- Maintenance. Keeping your property in good shape will also be your job, as opposed to a rental, where this is usually the landlord’s job. Trimming the hedges and cleaning gutters can be time consuming, or expensive, if you hire someone to do it for you.
- Repairs. When you were renting and had a problem, such as a leaky faucet or a broken appliance, you would just call the landlord and had it repaired or replaced. When owning a home, you will have to do these repairs on your own, or hire someone and suffer the cost. Damages to your roof or electrical and plumbing systems can be very costly, especially if they are not resolved in time.
As you can see in this article, owning a home won’t necessarily be a better choice over renting. There are more costs and risks associated with home ownership vs. renting, but the benefits of owning your own home certainly exceed the downsides. It is up to you to research what owning your own home involves, how much it will cost, and decide if it’s a step that you can take without suffering financially and ending up regretting your decision.