Home Ownership: it's just a little bit more . . .
By Stew
Someday, I hope to own another home, but not until I am good and ready. We are quite happy with our rental situation at the moment.
When we purchased our first home, after a year of marriage, everyone told us what a great decision we had made – “It’s the best investment you can make . . . we were married for ten years before we could afford our own home.” I am not opposed to home ownership. Under the right conditions, I think it is a great idea, however, it is important to recognize that as a culture we have been conditioned to think that owning your own home is the pinnacle of human existence. The problem is that in the past, when a person owned a home, they truly owned it – now the definition of home ownership has become “living in a building owned by a bank”. And that building, owned by the bank always seemed to cost us just a little more.There were many things that I did not understand when I signed the documents that committed me to live in and care for the bank’s home for the last eight years. The biggest factor that I did not completely grasp was the true cost of home ownership. I soon came to realize that owning a home costs just a little bit more.
Loan Approval and Shopping for a Home
When you go to the bank for loan approval, the monthly payments always seem to be a few dollars higher than you were originally told. The realtor will always show you homes that are just a little bit more than what you think you can afford.
Mortgage
Understand all of the components of your mortgage payment – everyone knows about principle and interest, but make sure you know if you are subject to private mortgage insurance or PMI. PMI can add anywhere from $20 to $100 per month to your monthly payment. Your broker will tell you “it’s just a little bit more“.
Closing Costs
Yes, they were all there on the little sheet, the whole list, but when we bought our first home, I never really looked at the entire picture. I saw all the relatively small amounts – $50 here, $250 there, $75 again, but each one was just a little more out of pocket cash or making my monthly mortgage payment just a little higher.
Property taxes
Property taxes are a major deal killer in my book. In the state where we lived, our taxes were almost double the amount that they would have been in any other state. Be sure to use this in figuring the cost of home ownership. Taxes are always just a little bit more.
Insurance
I think my homeowner’s insurance was reasonable. I think we were getting a good value for our money, but sometimes insurance is not always something that new homeowner’s think about critically. To them it’s just a little bit more.
Maintenance
I really underestimated how much money we would spend on maintenance costs when we became “home owners”. There are so many things that the house needs, things break, improvements are needed and it’s all just a little bit more.
Utilities
We did everything we could to reduce utility costs in our home, but we never seemed to be under budget. Cold winters, hot summers and everything in between all served to squeeze just a little more money out of us.
Here is the point, new, potential homebuyers need to look at ever single expense as a lump sum before making the decision to buy. I do not believe that my wife and I would have become home owners eight months into our marriage if we had added the following costs:
- Principle
- Interest
- Private Mortgage Insurance
- Homeowner’s Insurance
- Soft water softener rental
- Heating bill
- Electric bill
- Water bill
- Maintenance costs – lawn care, exterior, interior, systems repair, cleaning
Add that stuff up, look at that number and if you still think you want to buy the house – great! But be sure to add just a little bit more.
Photo by jamiejohndavies
July 16th, 2009 at 8:02 am
I think that’s a great point! We just recently bought our second home (the first we moved and turned into a rental property) and the extra costs were a shock. We moved to New Orleans, LA and the insurance down here is amazingly expensive – 4,000 a year for home owners, fire and flood, plus 4k in taxes. I’m used to spending about 500 a year on insurance on our other home. These costs alone add $600/month in expenses(!!)
If we had known that before we moved down here we would have definitely reconsidered it.
July 16th, 2009 at 8:04 am
Actually I was wrong, the costs are more than that, I was just checking some numbers. The extra cost per month is closer to $800!
July 16th, 2009 at 8:57 am
being a homeowner has many variables that many first time homeowners (like us) don’t factor in. in 2004 the state of florida had three major hurricanes. we didn’t expect our insurance to go from $700 a year to $3500 a year. didn’t have enough in escrow for that bill!! we were blessed that our mortgage carrier paid it but our monthly payment went up about $300 a month. then of course property taxes went up to repair all of the damage to the schools, govt. buildings, etc. i guess the moral of the story is that you should not be living paycheck to paycheck and be a homeowner. there are just to many variables that can lead to financial disaster.
July 16th, 2009 at 9:04 am
Ugh, yes. We realized these numbers while searching for a house, and we thought, “heck with this. Let’s keep on renting for awhile.”
We simply can’t afford all these extras that come along with having a mortgage and continue to have a reasonable standard of living.
Now, we’re saving for a down payment but also a variety of the extras — closing costs, prepaids, maintenance, etc
July 16th, 2009 at 9:35 am
Stew,
Amazing Post, and should ring true for anyone who purchased a home. I remember when I was closing on my home, and each person at the table seemed to take a little bit more from my pocket!
July 16th, 2009 at 9:41 am
I agree completely. Unfortunately, people catch such a bad case of home fever that the calculator overheats and it no longer works. Once we make a decision to buy a home there is often no stopping us.
July 16th, 2009 at 9:51 am
Home fever. That’s exactly it – once we make the decison to buy, cost does not seem to matter anymore. $10 here, $20 there, nothing deters us.
July 16th, 2009 at 10:34 am
Haha. “Home fever.” I had it, but was able to cure myself before I got in over my head. Now my girlfriend has it and I can’t find the right prescription to fight it!
I want to own a home and I can now afford to own one, but there is one other major drawback to being an owner that many people don’t consider. A home is like a geographic anchor! Now, I know there are a lot of creative ways to work around this, but a lot of them are just that, “work.” As I attempt to transition into a location independent lifestyle that will allow me to go anywhere I want in the world and still earn a living, the idea of owning a big geo-anchor is becoming less and less enticing. Yet I still want the autonomy that comes with owning.
Tough decisions!
July 16th, 2009 at 11:11 am
I thought you bought a house in the mountains. I know you’re renting out your old house in another state. Have you moved from the mountain house into a rental?
July 16th, 2009 at 11:14 am
I think a lot of people forget about the items that need to be replace long term – like water heaters, painting exterior, A/C, furnace etc. It is really hard to budget for these as you can’t always predict how long they will last. Again, while the all important emergency fund is needed.
July 16th, 2009 at 11:37 am
Deanna, sorry, lots of people have been making that mistake – GLBLguy is living in the mountains and renting his previous home. I’m just Stew and I am currently renting while trying to sell my home in a previous state. Honest mistake – maybe I need an icon or something to let people know when I post and when glbl is posting . . .
July 16th, 2009 at 12:01 pm
Stew:
I think the problem is that if you are reading the blog through a reader (i.e. I’m using Sage) for some reason the “by Stew” does not show up unless you click through. (Neither does the ad)
I’ve done a double take a couple times thinking HUH? what is GBLGuy talking about??? then realized it was you or vice versa.
You may want to have the first line of any article be something that lets us know.
July 16th, 2009 at 12:39 pm
That’s great – people think glblguy is nuts. Then they realize, “oh, its just crazy Stew.” Ha! Love it. I did not realize that the byline was not coming through on the reader. We will figure something out.
July 16th, 2009 at 12:41 pm
I think, too, that we need to take pride out of the picture when making our home-buying decisions. Our first little home, including taxes and insurance, cost less than the our rent. It was a wonderful situation for us. Our home was imperfect but it had a huge yard and was in a quiet location. Sometimes we felt that people didn’t understand our choice b/c colleagues were all buying newer and bigger. But we were being faithful with what we had (and repaying student loans to the tune of $800/mos at the same time). When buying our current home, the bank would have given us much more money than we knew we were able to afford. To a large degree, emotions must not enter in. Home repairs cost an arm and a leg and are a reality… they’re not just a $100/mos… things like concrete, window replacements, new roofs, etc. they cost big, not to mention little plumbing issues, new stain, whatever. In addition, when choosing our homes we need to realize that taxes and insurance ARE NOT STATIC. They seem to constantly be on the rise (even when salaries are not) so we must allow ourselves wiggle room. We’ve been happy with our choices and I’m grateful. Rents here are high f(to us). As an example, a two-bedroom appt would cost us at least $900/mos plus utilities (we’re a family of five so this wouldn’t even work) or a half a house with three bedrooms would cost us $1500-1600/mos plus utilities. It is still a better financial option for us to own but I’ll be more careful when encouraging my younger siblings to own rather than rent.
July 16th, 2009 at 2:24 pm
Great point. We got the same “you’re doing so great!” type comments… but we don’t own anything. Well, we own about 10% of something.
July 16th, 2009 at 2:31 pm
Hi Stew,
When the home you were trying to sell closes, you might consider a post about the cost of selling a home with closing cost, realtor fees, etc. It’s not something you think about when you buy the home, and I think it would be interesting information to share.
July 16th, 2009 at 8:35 pm
I think under the right circumstances e.g. prices are low, etc. it may be wise to purchase a home but the important thing is that we should calculate carefully what we can or cannot afford. As a rule, I don’t take out a mortgage of more than 50% of the home value, so that in the worst case (a forced sale), I can still repay the loan and not be in debt.
July 16th, 2009 at 9:22 pm
Yes, Keri, I think waiting to purchase a house until you have that much saved up is a wise idea. There are some situations where I might do it with 30 or 40 percent, but never less than 20.
July 16th, 2009 at 9:33 pm
This is a GREAT post – every first time (and maybe even second time) buyer should read this! Mr. T and I are always shocked at what the bank says we can afford when we get prequalified, it’s like they want us to live like we’re destitute! All the extras really add up and if you want to actually have a savings account – really crunch the numbers.
Last year we sold our home and moved. The bank prequalified us for over $400K – and we laughed and said “No thanks!” We found a home for $235,000 – and it’s still tight some months!! I can’t imagine what life would be like if we had to pay an extra $1000 per month for a mortgage. We definitely wouldn’t be saving up for our retirement!
July 17th, 2009 at 10:10 am
Owning a home can become more like a nightmare if you bite off more than you can chew. It’s important to match your home ownership plans with what you can truly afford.
July 17th, 2009 at 11:22 am
I’m glad that this post is going to make people aware of all of the “extra” costs associated with homeownership. I guess I’m a little surprised at how surpised everyone seems to be by the extra costs from closing to insurance to home maintenance. When my husband and I started looking at homes we researched all of the costs and figured them in, so there were no surprises. When we found what became our house, our realtor told us all about the closing costs before we ever made an offer. She actually estimated high, so we were pleasantly surprised when they were less. Of course as part of our offer we got the seller to agree to cover the closing costs.
July 17th, 2009 at 12:59 pm
Hopefully the longer you wait, the more down payment you will be able to accumulate.
January 6th, 2011 at 10:52 pm
What makes people think they’re “homeowners”? Reality check: You are not the homeowner, the bank is. You are the tenant and the bank is your landlord: A landlord who lets you paint your walls any color you want and let you mow your own lawn, but who, when that “rent” isn’t paid on time, puts you out on the street (eviction vs. foreclosure? They smart about the same). And what on earth makes suckers go out and charge up and spend all kinds of money on remodeling a house that isn’t even legally theirs? It’s like buying a new washer and dryer fo your landlord when you’re just a renter. Guess what? When they evict/foreclose on you, they get to keep it all! Sheesh. Wake up, people.
October 24th, 2011 at 1:25 pm
This could have been my story! We also purchased a home after 1 year of marriage, then realized how foolish we were. We were planning too many steps ahead, and after only a few years, we were ready to move with very little paid off and a LOT paid in interest. When we sold our house, we ended up owing $10,000—that alone, not to mention the $1,100 per month mortgage, far exceeded what we would have sunk into renting little apartment those 3 years. Now, we’re renting, licking our wounds, and not planning to buy until we can put 100% down.