The Hidden Costs of Home Ownership

Principal, interest, taxes and insurance are just the beginning. Whether you’re a first-time buyer or thinking about moving up, you should plan for extra costs that could add up to thousands each year.Image

Michael, an accountant from Florida, is no dummy when it comes to money. But he was astonished by how squeezed he felt financially after buying a home several years ago.

“The monthly payment is manageable. The maintenance is the problem,” he e-mailed me. “Each year there are one or two major things that cost $1,000 to $3,000.”

Michael has fixed the roof, repainted the exterior, replaced the furnace, rehabilitated the air conditioning system and repaired a leaking basement — with each project costing $2,400 to $2,800, for a total outlay of nearly $13,000. That doesn’t count several plumbing repairs made over the years, or the $4,000 he spent to finish a walk-in closet and add a home office.

First-time homeowners are often startled by the hidden costs of owning a home. The traditional measure of housing expenses — PITI, which stands for principal, interest, taxes and insurance — is just the beginning. Maintenance, repairs, supplemental insurance, home improvements and decorating can cost you thousands of dollars a year more than you expect.

If you’re ready to make the jump from renting to buying, and you’re financially in good shape, don’t let these expenses dissuade you. Be prepared, however, to make sure your home purchase doesn’t drive you into unexpected debt.

Making maintenance routine

How much your home will cost you in maintenance and repairs depends on several factors: the age of the home, how well it’s been treated by previous owners, the harshness of your climate — and how much money you want to get out of your home when you sell it.

What should you budget annually for such repairs and maintenance? At least 1% of the home’s purchase price, says finance expert Eric Tyson, co-author of “Home Buying for Dummies.”

If you bought a $200,000 home, for example, you should be setting aside at least $2,000 a year.

Your best bet is to divide your annual repair and maintenance budget by 12, and set that amount aside each month into a special fund. With the $200,000 home above, that would mean transferring $167 a month into your home-repair fund. Some years you’ll spend less, but others you’ll spend more. A new roof for your home, for example, can run $10,000 or more.

In fact, some people budget much more than 1% annually for these costs. Steve Becker of Carrollton, Texas, a homeowner for 30 years, believes his repair and maintenance costs run between 2% and 3% each year.

“I think this is where a lot of people get into trouble,” Becker said. They don’t spend enough and, as a result, many homes are poorly maintained. “When [the houses] get bad enough, people just sell them and move on to something new, much as they do with cars.”

That’s an expensive way to go. Many buyers won’t even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.

Ignoring problems can cost you plenty, even if you don’t sell. A small problem like a leaky toilet easily can lead to a rotted floor, termites and mold — all of which are much more expensive to remedy, and can cost you a lot more trouble if you decide to sell your home privately.

Making sure your home is covered

If you need to take out a mortgage to buy a home — which most of us do — your lender will require you to purchase homeowners’ insurance. These policies cover you for most damage to your property, such as that caused by fire or theft.

Homeowners’ insurance doesn’t cover everything, however. Floods, tornados, hurricanes and earthquakes are among the perils that typically aren’t included. If you live in an area where one or more of these catastrophes is a possibility, you should consider buying supplemental insurance to cover your risk. The cost varies widely, from just a few hundred dollars to thousands of dollars a year.

You may also need to buy additional coverage if you have a large collection of antiques, valuable jewelry, furs or lots of computer equipment. Homeowners’ policies usually put limits, often fairly low, on how much of these items they’ll pay for, and require you to buy a “rider” for an extra fee if you want them fully covered.

Improving your home the right way

One of the great things about being a homeowner is the opportunity to put your personal stamp on a house. You can paint the walls mauve and chartreuse, if you want, without begging a landlord’s permission.

It’s easy to go overboard with home improvements, though. Relatively few projects add much lasting value to your home, let alone guarantee that you’ll recoup your costs.

The big projects can be pretty expensive, as well. A major kitchen redo cost an average $38,769 last year, according to Remodeling magazine, while adding a master suite averaged $63,275. For the average price tag of the most common projects, see Remodeling’s latest Cost vs. Value survey; use the link at left.

Even changing the color of your house can be pricey. The typical exterior paint job costs $8,336.

The more you do yourself, of course, the lower the cost. A few weekends of hard labor could shave the painting bill to less than $1,000 for materials. But not every project is a candidate for doing-it-yourself. Many homeowners choose to hire professionals for electrical, plumbing and skilled carpentry work.

Financial planners recommend borrowing money only when you’re buying an asset that appreciates in value, and home improvements typically lose value over time which can be problem if you want to sell homes fast.

Furnishings cost money, too

You’ll also want to budget money for additional furnishings. Since your new home is likely to be larger than your apartment, you’ll probably need more furniture. You may also be buying window treatments, lighting fixtures, carpet or area rugs and appliances — all of which can add up to tens of thousands of dollars.

Figure out your budget ahead of time and make sure you have that amount in savings — after all the other costs of buying a home are factored in.

This is a “do as I say, not as I did” recommendation. The last time we bought a house, I completely forgot about closing costs and wound up having to raid our “home improvement” fund for the $10,000 we needed to close the deal. As a result, we had a wonderful new home — and a completely empty living room for more than a year.

A much better course is to plan for these hidden costs so that if you decide to, you can sell your home fast for cash. Then you can meet the inevitable bills with confidence, rather than stressing or going into debt. You’ll be a happier homeowner, and your well-maintained, appropriately furnished home will reflect your good planning.