Understanding Homeownership Costs: Mortgage Payment

The keys to your kingdom

Owning a home is a major milestone for many adults, and it can be an exciting experience. But before taking that plunge into homeownership, it’s important to understand all of the costs associated with it. Buying a house requires more than just a down payment and mortgage payments. Numerous additional expenses can add up quickly; from property taxes to repairs and maintenance, there are many factors to consider when estimating the total costs of owning a home.

The Hidden Costs of Homeownership

From insurance to taxes and maintenance to energy bills, there can be a lot of hidden costs associated with homeownership that can easily add up beyond just your mortgage payments. For instance, you’ll need to factor in:

  1. Property Taxes- These vary by region, but will generally run you between 1 to 6 percent of the property’s value per year.
  2. Homeowners Insurance- This will cover any damage caused by storms or fires, as well as liability for any injury that may occur within your home.
  3. Maintenance- This includes the cost of keeping your home and property in good condition and can range from minor repairs like replacing a leaky faucet to major renovations like replacing the roof. 
  4. Utilities- Depending on where you live, utilities like water, electricity, gas, or oil can vary significantly in price but will need to be factored into your budget for all homeownership costs.

It’s important to remember that these are all factors when deciding if homeownership is right for you—they’re part of the total cost of owning a home and the monthly expenses associated with it.

Understanding Property Taxes and Insurance

Beyond the mortgage payment, homeownership can be a pricey endeavor. Property taxes and insurance are two unavoidable costs that must be considered when buying a home.

Property taxes are typically assessed on an annual basis at the local level and vary by jurisdiction. A homeowner’s property tax bill is generally based on their home’s estimated market value, including any improvements made to it. Local governing authorities use these property taxes to fund public schools, city and county services, public safety initiatives, and more.

Homeowner insurance may be required for borrowers with a mortgage, but even if one is not required to purchase a policy it’s still highly recommended as it can protect the structure of your home and belongings in the case of natural disaster or theft. Homeowner insurance policies usually include coverage for fire, theft, vandalism, personal liability, flooding, and more—all of which should be considered when calculating the total cost of homeownership.

What to Consider Before Taking the Plunge Into Homeownership?

Before taking the plunge into homeownership, it is important to consider all of the potential costs. Beyond mortgage payments, there may be property taxes, upkeep, repairs, and homeowner’s insurance.

  • Property Taxes- Property taxes are generally paid through an escrow account or to a municipality or other local government entity. In some cases, these taxes are based on a percentage of the home’s assessed value and in others on its actual appraisal value. Property taxes can vary significantly from area to area and can rise year after year. Potential homeowners need to research the property tax rate for a given area before deciding to purchase a home there.
  • Upkeep and Repairs- Potential homeowners should also factor in the costs of maintaining their future home. These costs include any necessary repairs that may arise to keep the home in good condition and any upgrades that may be desired over time. This could mean anything from replacing windows to painting walls or replacing old appliances. It is important to think ahead by creating an emergency fund for unexpected repairs and updates that may arise later down the line.
  • Homeowner’s Insurance- Homeowner’s insurance is another expense that potential homeowners should consider before purchasing a home. This type of insurance protects against losses due to theft, fire, wind damage, and other risks associated with owning a home. Furthermore, this type of coverage can include personal liabilities such as medical costs if someone were injured at your home or if you were sued for damages beyond what your policy covers. This cost will vary depending on where you live so it is important to shop around for quotes from different insurance carriers before making a decision.

Additional Expenses to Consider

There are several additional expenses associated with homeownership that many first-time buyers may not consider but are important to plan for. These expenses include:

  1. Property Taxes- Property taxes are typically based on the assessed value of the property and must be paid annually. Depending on the location, taxes can be significant, so it’s important to factor these into your budget.
  2. Homeowner’s Insurance- Homeowner’s insurance is mandatory if you have a mortgage, and is designed to protect your home from losses due to fires, storms, and other similar disasters. The cost of homeowner’s insurance can vary widely depending on the value of the home, so be sure to budget for this expense.
  3. Home Maintenance and Repair Costs- Maintaining your home requires regular upkeep, including routine maintenance like replacing air filters or cleaning gutters as well as larger projects such as repainting or repairs to major appliances like furnaces and air conditioners. To ensure that your home stays in great shape over the years, plan to set aside money each month to cover these costs when they arise.
  4. Calculating Property Tax Deductions– The cost of owning a home goes beyond the principal mortgage payment, and one of the biggest of these additional costs is property taxes. Homeowners are required to pay property taxes on an annual basis, and this amount can be deducted from their income tax returns if they itemize deductions. The tax rate is based on the local government’s budget needs and your home’s estimated market value.

To get an accurate idea of your future property tax payments, consider the following:

  1. Desired Location- The local tax rate varies by county or city.
  2. Home’s Market Value- The higher your home’s assessed market value, the higher the taxes will be.
  3. Any Exemptions you may Qualify for Governments frequently provide exemptions that can reduce how much you pay in property tax.

To calculate exactly how much you should expect to pay in property taxes each year, contact your county or city’s treasurer’s office for more information about their specific calculations and possible exemptions available to you.

Maintenance and Repairs Every Homeowner Needs to Plan For

Maintenance and repairs are an important part of being a homeowner, and it is essential to plan for them. While some costs are due to normal wear and tear, others may be related to more serious accidents or other unforeseen issues.

To protect your home from unexpected maintenance costs, it’s important to set aside a portion of your budget for these expenses. Here are some typical repairs and maintenance items that homeowners need to plan for:

  1. Roofing repairs or replacements
  2. Heating, ventilation, and air conditioning (HVAC) system repairs or replacements
  3. Appliance repair or replacement
  4. Plumbing issues
  5. Electrical system upgrades
  6. Landscaping upkeep and maintenance
  7. Window and door repair or replacement

It’s also good practice to save up an emergency fund in case you experience any major problems with your home. This fund should be large enough to cover emergencies like the failure of the furnace in the wintertime or extensive water damage from a storm. Having this financial cushion can help you avoid stress when unexpected issues arise.

Ongoing Maintenance and Repair Costs

Owning a home requires ongoing maintenance, repair, and improvement work that can be costly. The cost of the upkeep of the home can vary greatly depending on the age and condition of the property. Typical ongoing costs include:

  • Homeowner and Property Insurance- Homeowner’s insurance covers you from liability in case an accident occurs on your property. It should also cover you for natural disasters such as fires, floods, or other catastrophes. Property insurance covers repairs to the building itself and can range from $500 to $3000 per year.
  • Lawn Care and Landscaping- Keeping your lawn trimmed and healthy takes time and money. Depending on how big your lawn is, this cost will vary significantly. A good rule of thumb is to budget 1 percent of your home’s purchase price annually for landscaping and lawn care.
  • Repairs/Maintenance- From roofing repairs, plumbing problems, and HVAC tune-ups—homeowners should expect to spend some money regularly on repairs and maintenance throughout the year. It’s wise to set aside at least 1-2% of the purchase price for home repairs annually to properly address issues before they become large problems that are out of control and cost a fortune.

Preparing for Unexpected Costs Associated with Homeownership

No matter how much you plan, it is impossible to prepare for all the costs associated with homeownership. Many of these unexpected costs are related to maintenance and repairs, and for homeowners who do not have the new home warranty to fall back on, it’s important to build up a savings account to help manage these expenses. Some of the most common and expensive issues homeowners may face include:

  • Sewer or plumbing repairs
  • Leaky roof replacements
  • Electrical wiring upgrades
  • HVAC system maintenance
  • Foundation repairs

It’s impossible to guess when these issues might arise, so it’s best to be prepared by setting aside a separate fund specifically designed for maintenance and repair costs. Additionally, regular inspections can help tentatively spot any potential issues and allow time to save up funds before they become an expensive undertaking. Homeowners should strive to have at least three months’ worth of mortgage payments tucked away in case of any unforeseen expenses.

Insurance for your Home

When purchasing a home, insurance is an important factor to consider. Homeowner’s insurance helps to protect you and your property in the event of catastrophic loss or damage due to natural disasters, home invasions, fires, and more. Most lenders require homeowner’s insurance to be in place before handing over the keys.

The cost of homeowner’s insurance varies by location, and is typically calculated by your credit score, the number of stories in your home, the age of the house, and whether it has a swimming pool or other potentially dangerous fixtures. Your premium could also be affected by where you live, as those living in areas prone to hurricanes or wildfires may pay higher rates. To require coverage for your home, there are additional coverages you can purchase for additional peace of mind—such as earthquake coverage or a rider for specific items like jewelry or artwork—which will also be factored into your premium. Talk with an experienced financial advisor about what type of coverage is best for you and your family.

Tips for Budgeting for Homeownership

Owning your first home carries a weight of responsibility and cost that can be difficult to manage. Fortunately, there are steps you can take to help you budget for homeownership and reduce the potential financial stress.

  • Start with the Basics- Before you can start budgeting for homeownership, you must understand all of the costs associated with it. As well as the mortgage payments include items such as:
  1. Home Insurance
  2. Property taxes
  3. Maintenance (cleaning supplies, yard work, etc.)
  4. Utilities (energy provider costs, water bills, Internet/phone/cable)
  5. Updates or renovations
  6. These sorts of costs will add up quickly and should be taken into account when you start to budget.
  • Set Aside Money for Emergencies– Unexpected repairs or situations are bound to crop up from time to time. A good habit to get into when budgeting is setting aside money for such emergencies. You could save between 1% and 4% of the total value of your house to cover contingencies like a broken appliance or a surprise plumbing issue or even sudden home improvements. This reserve fund will help ensure that any unexpected expenses won’t break your budget.
  • Utilize Technology- There are some great apps out there that can help ease the burden of managing a household budget. Apps like Mint and YNAB make it easy to track spending and create an effective budget plan that works for you. They will even alert you when bills are due so that you can adjust your spending accordingly throughout the month to stay on top of payments.