More Than a Mortgage
Imagine you’ve made it through closing. You’ve purchased a reasonably priced home. You paid around $5,000 for closing cost fees, taxes and insurance; another $2,000 for moving in and fixing up. You have a an ample reserve fund set aside in your bank and retirement accounts. You know you’re going to make the mortgage loan payments and interest (plus homeowners’ association payments, where applicable). Your budget is ready. Homeownership is your new reality.
Of course, along with your mortgage, you’ll have other expenses to anticipate. Insurance. Repairs and upkeep.
Let’s look at these expenses. Then, you can enter them into your budget, and see what you’ll really need to keep up a home. Here goes…
A House Needs More Insurance Than Renting Does.
You must have a homeowner’s (or condo owner’s) insurance policy. There’s an escrow account for most mortgages. It includes the money for insurance premiums, as well as other regular payments such as private mortgage insurance (which we’ll discuss in a minute) and property taxes. In this case the homeowner pays one bundled monthly payment to the mortgage servicer and it includes insurance.
Pro tip: Speak with your accountant about your loan terms and any money you take from bank or retirement accounts, so you are prepared for your tax bill.
The cost of a U.S. homeowner policy at the time of this writing is usually cited at $1,100 to $1,300. That’s several times the generally cited cost of a renter’s policy. Why? The main difference is that homeowners’ policies have dwelling coverage, while renters’ policies don’t.
The price of a policy depends on where the home is, the type of construction, and the age of the building. Bundling homeowner’s or condo owner’s insurance with car insurance can reduce the price somewhat for the policy holder. (The owner would still pay for the car insurance; it wouldn’t come out of escrow.)
☛ In some cases, it makes sense to seek out private flood insurance and add it to your mix to guard against costly water infiltration risks. Deeds.com has more information on climate-related flood risks here.
And will you be renting out that new house or condo? Landlord insurance coverage that anticipates liability for accidents, and potential loss of payments if renters must leave for a reason covered in the policy. If you need landlord coverage, expect to pay roughly 15% more than you would for a standard homeowner policy.
An Owner May Buy an Optional Title Insurance Policy at Closing
You might be aware that lenders always expect the borrower (or the seller) to pay for title insurance at closing. You might not be aware that the borrower can also buy an owner’s title policy that protects the title for good — not just while it’s important to the lender.
The buyer makes one upfront payment of a few hundred dollars for an owner’s title policy — no monthly premiums. It covers the title even if the home is put into a living trust, or passes to heirs.
Pro tip: If the seller already possesses an owner’s policy, the buyer might be eligible for a substitution rate when buying new owner’s title coverage.
An owner’s policy covers costs to remedy past problems that become obvious after purchase, such as an error in the legal description, missing heirs, undisclosed liens, or other claims on the property.
When buying an owner’s title policy, what level of coverage is best? Extended coverage (which costs around 25% more), or a standard policy?
An extended (enhanced) owner’s title policy covers more items. It addresses situations like unrecorded liens, property line disagreements that didn’t come to light when the most recent property survey was done, and title scams.
☛ Learn more from Deeds.com about steering clear of deed fraud and scams.
Private Mortgage Insurance Can Weigh on a Budget
Private mortgage insurance (PMI), for the homeowner who has to pay it, is part of the monthly mortgage payment. It becomes a fact of life, just like the mortgage principal and interest. Yet it is worth talking about, because in some cases it’s an expenditure that can be removed.
Mortgage lenders add a monthly PMI charge for private insurance when a borrower doesn’t put at least 20% of the appraised price down on the home. Why? Because such a home buyer’s the loan-to-value ratio is considered high-risk for the lender. The idea is that buyers who invest a big portion of the price in their houses are the least likely to walk away from their mortgages.
So, PMI is a type of mortgage insurance that covers the lender but does nothing for the home buyer. PMI could be anywhere from .1% of the mortgage to 1%. It can run as high as $70 a month, says Freddie Mac, for every $100,000 in loan debt, depending on the down payment and the loan type.
Why might you accept PMI? In certain situations, it’s the simplest or the only way to get a loan approval. In a low-interest environment, it can be worthwhile to accept PMI to get a good deal on a mortgage.
If you are on a Freddie Mac or Fannie Mae loan, ask for the PMI to be removed as soon as you hit that 20% ratio. You can “overpay” the monthly mortgage principal to hit your goal faster. While FHA loans don’t remove PMI for you, it might be worthwhile to refinance to a conventional loan without PMI when you’re ready.
Fixes and Replacements Are a Fact of the Homeowner’s Life
Set money aside for home upkeep and improvements. New owners commonly run into the following costs:
- Anywhere from $800 to $4000 or more to cover a floor (more if the floor has been damaged by chemicals, pets, etc.).
- As much as $10,000 for a new HVAC system, duct cleaning, and air filter. Expect additional costs for any unknown water damage, and for dehumidifiers, lock replacements, storm door replacements. etc.
- Miscellaneous costs for appliance, electrical, or plumbing repairs, painting, chimney or gutter cleaning costs, tree services, fence repairs, garage door openers, garden tools, and fixes for automated systems and fire alarms. New roofs, windows, or insulation can be quite expensive.
- Homeowners’ association fees. These run several hundred dollars a month, and are paid by the unit owner directly, not from the mortgage escrow account. The HOA should cover snow removal, landscaping, waste, water, and sewer management, pools, gyms, and other amenities, and general upkeep for roads and common areas within the community. Like taxes, HOA fees tend to go up from year to year.
Another important reason to save ample cash reserves? Potential changes in a homeowner’s health or employment status. So, it’s important to lay out a budget, and stick to it. Before closing, a home buyer needs to make time to study the professional home inspector’s report and begin by budgeting for the known issues.
While Maintaining a Home Is Costly, It’s Usually Worth It
Most people run into unexpected costs when they own a home. Nevertheless, most people want to own their homes. To purchase a home, and faithfully pay it off, is to build equity and credit strength. It means comfort, autonomy, and security. And it may well be cheaper than renting.
Buyers should make their decisions with full knowledge of the potential costs ahead. This will avert frustration, and help the buyer take those costs in stride.
Supporting References
Consumer Financial Protection Bureau Fact Sheet: What Is Private Mortgage Insurance?
Mark Fitzpatrick for ValuePenguin.com: Home Insurance Versus Renters Insurance (updated Dec. 8, 2021; stating that the average cost of a U.S. homeowner’s insurance policy is $1,083 a year).
Brad Cartier for Stessa.com: The 2022 Landlord Insurance Guide You Can’t Afford to Miss (citing Insurance.com to quote an average cost of a U.S. homeowner policy at $1,288 a year, or $1,481 a with landlord insurance).
My Home by FreddieMac.com: Owning Your Home.
Deeds.com: A Guide to Private Mortgage Insurance (Dec. 18, 2020).
Deeds.com: Home Buyers, Cover Your Assets: Choosing Between Standard and Extended Title Insurance (Dec. 11, 2020).
Deeds.com: The Master Policy Versus Individual Homeowner’s Coverage (Jan. 21, 2022).
Photo credits: Max Vakhtbovych and Cottonbro, via Pexels.