How to Estimate the Costs of Home Ownership

Millions of first time home buyers often do not estimate the costs of home ownership prior to taking on a mortgage payment. The purchase price of the home along with a low interest rate and a choice area is all a lot of people need to convince themselves they are making the right decision. However, there are some very important factors you should consider prior to making a commitment to buy a home.

Difficulty: Easy

Instructions

1. Property Taxes - Local governments and schools often depend on property taxes as their primary source of income. These taxes are based on a homes assessed value which occur every three to five years. It's important how much value your locality has placed on a home before making a purchase. The average is around 1% of the value of your home but it does vary depending on your state of residence.

2. Home Owners Insurance - This insurance provides coverage in the event of a disaster that causes damage to your property. It also covers any accidents that may happen at the home which you or members of your family are liable for. If you financed the purchase of your home with a mortgage, the lender will require you to obtain a homeowners insurance policy. Check with a local insurance agent about rates specific to your area.

3. Private Mortgage Insurance - If your down payment on a home is less than 20% of the selling price, you are required to obtain private mortgage insurance or PMI for short. The amount will vary depending on the amount of your down payment and loan itself. You may be eligible to have this requirement waived if you agree to a higher interest rate although that is typically not advisable. It's best to be in a position to put at least 20% down in order to avoid PMI all together. The average amount is usually around .05% of the purchase price of your home.

4. Home Maintenance - This is usually one of those forgotten costs that surface as soon as you have to make some sort of repair to your home. It's surprising that people and especially those who are used to renting don't account for the fact that repairs made to a home are funded by money out of their own back pockets. A general rule of thumb is to estimate 1% of the value of your home for annual repairs. Of course, if you buy an older home the repair costs can be substantial and you will have to adjust as necessary.

Tips & Warnings

• There are many advantages to owning your own home but there are also many things to consider prior to becoming a home owner. It's important to know and understand the costs involved to avoid getting in over your head with a mortgage payment you can't handle. If you don't estimate the costs of home ownership before hand, you may find yourself on an uphill climb for a very long time.

Resources

• Property Tax Burdens by State
• Ways to Lower Your Homeowners Insurance Costs
• Private Mortgage Insurance
• Home Maintenance Cost Estimator
• Financial Resources Blog