Time and time again, millennials buy a house and are surprised by both the upfront costs and the ongoing costs of owning a home.
Last week, I talked about what you can expect to pay when you buy a home, which you can check out here. Now this weeks post will be entirely focused on the costs of owning a home after buying.
Let’s get into it.
This is the most common part that people understand. Your mortgage is the loan you got from the bank to help buy the house. You can pick 15, 20, or 30 year loans. I am typically a fan of 30 year mortgages for the flexibility it gives (you can always pay it down quicker), but it is a personal choice and based on what you can afford.
Continuing with last weeks example, if you were to buy a $750,000 house at today’s rate (7.2%) and put down 20%, your monthly payment would look like this.
Your payment for just amortizing the mortgage would be $4,101 a month.
Way too many people believe this is the total monthly outlay they will have, but that’s not true at all.
This picture is actually starting to tease the other expenses you will have.
The whole conversation around putting 20% down on a house really has to do with PMI.
PMI is an added on cost if you put less than 20% down on a conventional loan. PMI is arranged by the lender and provided by private insurance companies to help you get approved for the loan.
You can expect PMI to cost about 0.2% – 2% of your loan amount per year. You will have PMI till you hit 20% on your home usually. This can add up to be quite a bit.
As a homeowner, you need to pay property taxes. This is decided by your city, state, or county your property is located in. You can typically look this up online pretty easily to find out the percentage tax you will pay. You then multiple that by the value of your home.
Let’s look at an example for this using Carmel, Indiana, which is where I live.
As you can see, property taxes can add up quick. For this $750,000 home in Indiana, you would have $544 a month of added property taxes. You need to plan for this as this is quite a large amount.
I always like to note that where you live matters. My sister currently lives in a Chicago suburb, this same home and price would lead to $1,450 a month in property taxes. A $1,000 a month difference!
Property taxes are oftentimes paid through escrow. That simply means it is added to your monthly mortgage payment, they save it on the side, then pay your property taxes from that account when they are due. This is typically done because it is way easier to pay monthly then it is to save on your own and pay a lump sum.
You are required to get homeowners insurance before a bank will even issue you a loan, so I wouldn’t say this comes as a surprise. However, it is something that you need to prepare for. Homeowners insurance is also added to your monthly mortgage payment like property taxes and then paid from your escrow account.
For a $750,000 home in Indiana, this would be roughly $2,500 a year, so that’s another $200ish added to your monthly payment. It’s important to note that premiums can and do rise often as the value of your property/possessions grow. You definitely want to be aware of that.
One thing many do not know, is that most of these policies do not cover events like floods, hurricanes, earthquakes, etc. You will need to add that coverage on if you are worried about any of those.
Many times, not all, your house/condo will come with monthly or quarterly fees. These fees typically help cover services that benefit the neighborhood like garbage collection, snow plowing, lawn maintenance, etc.
I have seen HOA fees as low as $100 a month and as high as $1,800 a month for condo’s in high cost of living areas. Be aware that these can also change on you when they are revamping your neighborhood.
Upkeep is something people do not consider enough when they buy a home. You need to think through whether you are going to hire cleaners, lawn mowers, window cleaners, etc.? If so, you need to calculate this cost. If not, you may need to buy a lawn mower or other products to help you be able to do it. Do the math and plan for these expenses.
Time and time again, I see millennials just assume their utilities, AC, etc. will cost the same as their apartment. However, this is rarely the case. When millennials move, they are oftentimes moving to a bigger place, with multiple floors. This can lead to way higher utility costs that you need to be sure you plan for.
Very few millennials plan and save for maintenance costs. But you should! They are expected.
You should expect anywhere from 1-3% of the home value in maintenance costs a year. The older the home, the closer you can end up getting to 3%. This could be to replace appliances, the roof, pipes, electrical systems, etc.
I always recommend people hold in a cash/cash equivalent, dollars for expected maintenance costs per year. It pays off to be prepared for these expenses.
As you can see, there are a lot added costs beyond just the mortgage payment. As you prepare to buy a home, map this all out. The last thing you want to do is skip that step, buy the house, and then realize it is $1,000+ more than you expected and feel house poor. It’s a big decision, take the time to really map it out.
Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax , and financial team before making any changes to your financial plan.
Financial Advisor