Home Ownership – What Are The Costs?

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By Robin Landsman, Wake County Extension Agent

This is the second is a series about homeownership and covers the costs associated with homeownership.   The next and final installment in the  series will provide tips for making a smart purchase.

Buying a home is the biggest investment that most consumers will make and is a major achievement.  Home ownership is also a major financial responsibility.  Proper planning and money management are key to making wise choices when it comes to buying a home. Understanding the upfront and ongoing costs of homeownership is a critical part of the decision process.

There are significant expenditures to be anticipated before and after home purchase.  The upfront costs of purchase include closing costs, which are the out-of-pocket expenses comprising the appraisal, survey, loan application, home inspection, legal fees, title insurance, title or deed registration fees to record your ownership, and any other payments to professionals assisting with a home purchase.  These fees are in addition to the cash required for down payment.  The total upfront costs associated with a home purchase will depend on the type of loan and whether the purchaser qualifies for any special programs, of which are available in North Carolina.  The availability of programs to assist with the costs of owning a home can greatly reduce out of pocket expenses.  On average, total closing costs can range from two to seven percent of the purchase price of the home.

The minimum amount needed for a down payment is determined by the lender and represents the buyer’s first investment in a home.  Closing costs are often paid in advance of closing or payable at the time of closing.  Escrow, is an account established by the lender to hold funds to pay on the homeowner’s behalf, the homeowners annual insurance premium and periodic property taxes.   An escrow account is typically funded at closing in an amount equal to the initial two or three month payments of taxes and insurance.  However, as much as six months might be required, ask your lender about their procedures.  Be sure you know the tax rate in the area where you plan to purchase.  Homeowners’ insurance cost can vary from insurer to insurer, call a few insurance companies and ask for an estimate based on the type of property you plan to purchase.  Knowing your costs and the lender’s escrow account rules will assist you in estimating how much money you will need at closing to fund the escrow account.  A lender may require mortgage insurance, hazard insurance (typically for rental property) and/or flood insurance (be aware of the flood zone rating for the property you are considering).  Additional insurance requirements increase the monthly costs to the new homeowner since these are in addition to the mortgage (principal and interest) and taxes.

After signing on the dotted line and receiving the keys, the ongoing costs of home ownership begin with moving in.  Whether hiring a moving company or fitting all of one’s belongings into a car, it costs money to move.  Additionally, some utility companies require a deposit to open an account.  It is a good practice to request a history of expenses from the previous owner to estimate the total monthly cost of living in the home, including water, energy bills, garbage removal, etc. to better estimate monthly out-of-pocket expenses.  As a new homeowner, estimating the monthly costs, including mortgage payments, insurance and increased utilities payments, is only one piece of the budgeting process.

New homeowners also need to save for those unexpected repairs. When the first day of summer brings 90-degree heat and a broken air conditioner, a new homeowner learns the first lesson of homeownership.  Prepare for those expected and unexpected expenses by having a reserve fund. It is a good idea to have a ballpark estimate of what it will cost to maintain the home.  Housemaster.com estimates that homeowners should spend between 1 and 3 percent of the value of the home for maintenance and repairs.  All homes are different, and new homeowners should create their own ballpark estimate and include it in their monthly budget.

Owning a home is still the American dream, even with the changing economic factors that have added a few challenges to the process.  New homebuyers can set realistic goals by assessing their credit and getting pre-approved (not pre-qualified)  for a mortgage before seriously looking at property.  Being focused and planning carefully by understanding the costs involved lead individuals and families to successful home ownership.

There are many resources to guide consumers to make smart choices to buy, maintain and keep their homes:

http://hud.gov   US Department of Housing and Urban Development

www.homebuyinginstitute.com

www.consumer-action.org

www.money-wise.org

National Core Competencies discussed in this post:

Borrowing, spending, protecting

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One Response to “Home Ownership – What Are The Costs?”

  1. I’m Buying a Home, What Do I look For? « Dollar Decisions Blog Says:

    […] Dollar Decisions Blog more mindfulness – better money decisions everyday Home Ownership; What Are The;Costs? […]

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