The Real Costs of Homeownership
If you’ve been shopping for a home recently, no doubt you’ve heard that it’s a great time to buy. Mortgage interest rates have dropped precipitously and that puts homeownership within reach for more people than ever before. It also allows local residents to dream of owning a larger home than they may have thought possible. That’s because, apart from the purchase price of the home you choose, your mortgage interest rate is the single most influential factor driving how much you’ll pay each month on your mortgage.
Depending on the size and type of loan you choose, getting a low-rate mortgage right now can set you up to save thousands of dollars. That savings may be greater but also short-lived if you choose a variable-rate mortgage. That’s why many experts are recommending you lock in low rate on a fixed-rate mortgage right now.
But before you jump at the substantial opportunity the real estate and financial markets may present you with right now, take a step back and consider all the costs of homeownership. There are many expenses—some one-time and others ongoing—to take into account when figuring your homebuying budget. Many first-time homebuyers overlook these costs, which are typically not affected by changes in the credit market. So we’ve put together a list of some of the larger ones you may be missing in your budget calculations.
Homeowner’s insurance generally falls into two categories: property damage and liability. Property damage insurance protects the investment you’ve made in your home in the case of unexpected events like fire or natural disasters. It also provides coverage for your belongings, for example in the event you are burglarized. Liability insurance, on the other hand, protects people who may be injured while visiting your property.
When you borrow any amount of money to buy a home, your mortgage lender will insist that you purchase homeowner’s insurance that’s sufficient to cover the amount of your loan. While lenders mandate homeowner’s insurance to protect themselves, the best homeowner’s insurance policy will also protect your financial interests.
When purchasing a homeowner’s policy, it’s important to pay close attention to the coverage limits you select. While your mortgage lender may only compel you to purchase the minimum coverage required to protect its own investment in your home, it’s wise to elect coverage that far exceeds the amount remaining on your loan. With every dollar you pay against the principal of your mortgage, the need for robust liability coverage increases. A dire accident on your property could make you liable for thousands or even millions of dollars. Taking a more altruistic view, your homeowner’s policy ensures that a visitor who is injured on your property will be compensated for medical and other costs arising from the accident. And that visitor might be someone you love very much.
Compared to other states, North Carolina has fairly high homeowner’s insurance rates. The averageannual cost of a homeowner’s insurance policy in the state of North Carolina is around $1,086. Your premiums will vary depending on such factors as your home’s location, its value in today’s market, and the type and amount of coverage you select. Higher deductible policies can save you money. You can find various insurance rate estimators online without committing to a policy and it makes sense to compare several companies’ rates side by side. Just be sure to use the same parameters for each estimate.
Private Mortgage Insurance
Mortgage lenders often advertise low-money-down loans to attract customers. And depending on your credit-worthiness, you may indeed be able to purchase a home without a large down payment. But unless you have secured a VA or USDA loan—which are both smart options to explore if you and your property qualify—that low-money-down loan is likely to come at a cost. Private lenders typically require you to carry Private Mortgage Insurance (PMI) for the entire length of time that you have less than 20% equity in your home. The amount you pay for PMI is determined by your PMI interest rate (typically somewhere between .55% and 2.25%), the amount of you borrow to buy your home, and your home’s value. For that reason, we can’t estimate how much PMI will add to your monthly costs. But finding out is critical when creating a monthly budget.
Real estate taxes
Real estate taxes are a given, no matter where in the US you live. Communities depend on real estate taxes to fund indispensable services, from education to police and fire protection. If you love your neighborhood playground and public library, you can thank real estate taxes for those, too. Real estate taxes are based largely on the appraised value of your home. Factors that influence appraised value include the address and size of your home and certain home features. More bathrooms, for example, can mean a higher appraised value and higher taxes. Houses that are located on corner lots appraise higher than similar homes in the neighborhood.
Unlike the other expenses we have mentioned, the real estate tax on any home is relatively easy to estimate, by looking at previous tax records. But bear in mind that the government periodically re-evaluates a home’s appraised value and your tax rate may go up or down each year. By the same token, property tax rates are subject to change. Real estate tax is often collected in monthly increments by your lender (who in turn pays the government) along with your other mortgage expenses. The same may be true of your homeowner’s insurance premium.
Maintaining your home and its value
Leaky roofs happen. Paint peels. Furnaces fail. Depending on the age and condition of the home you buy, you can expect to spend a significant sum on home maintenance each year. And you should spend it. Taking care of repairs in a timely manner not only keeps your home safe, it also maintains its value. Over time, as you build equity, your home may become your largest asset. And that’s something worth protecting, indeed.
Here at Lodestone, we believe the dream of homeownership belongs to everyone. That’s why we want you to go into homeownership with full knowledge of the costs involved. While today’s low mortgage rates may lower some expenses, others remain unchanged. So keep your eyes wide open and your calculator handy as you search and budget for your next home.