Takeaways
- Homeownership is more expensive than your monthly mortgage payment.
- Planning for recurring homeownership expenses should be part of your budget.
- Saving for recurring expenses in a high-yield savings account can boost preparedness.
- Asking sellers to cover expenses or reducing the asking price of a home can offset costs.
- Maintenance expenses improve the longevity and attractiveness of your home.
What is a Mortgage?
A mortgage is a loan specifically used to purchase a house, condominium, land, or other type of real estate. If you are like most house hunters, you probably are not planning on buying your house outright with cash. Instead, lenders help buyers finance their home with a combination of a down payment and loan, known as a mortgage.
A mortgage is a loan from a bank or other financial institution that allows you to cover the purchase price of your home. It is a critical tool to support homeownership because it enables buyers to purchase a home today and pay for it over time. This process makes homeownership accessible to many who could not afford to pay the asking price of a home upfront.
There are several types of mortgages, but most homeowners choose a 30-year fixed-rate mortgage or a 15-year fixed-rate mortgage. When you take out one of these mortgages, you agree to pay back your lender over 30 to 15 years, respectively, with interest.
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When you take out a mortgage, the house you purchase is collateral for the loan, and if you fail to make the agreed-upon monthly payments, the lender has the right to take possession of your house. This process is known as foreclosure, which you want to avoid. Budgeting appropriately for your mortgage will help you consistently build wealth and increase your net worth.
6 Hidden Costs of Homeownership
Of course, paying your monthly mortgage is only one part of homeownership. There are several other recurring and non-obvious expenses that potential homeowners should understand. Here are six expensive recurring costs of homeownership.
1. Property Taxes
Property taxes are a significant and often overlooked cost of homeownership. Property taxes are recurring local taxes levied by municipalities, based on the assessed value of your property, which includes both the land and home (and any other structures on it). The rate of property taxes varies considerably depending on where you live and your property's value. Property taxes are crucial sources of revenue for local municipalities because they fund services like public schools, road maintenance, emergency services, and local infrastructure.
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When budgeting your monthly mortgage payments, it is essential to factor in property taxes, as they can significantly add to your monthly expenses. Most lenders require you to pay your property taxes as part of your monthly mortgage payment. If you have an FHA loan, VA loan, or other government-backed loan, you must have an escrow account.
Property tax rates can change and usually increase over time, especially in rapidly developing or appreciating areas (e.g., New York, San Francisco, Austin). Failure to pay property taxes can result in penalties or, in severe cases, a lien against your property. Before you buy a home, research the property tax rate in your area. Consider potential future increases and incorporate these costs into your long-term financial planning.
2. Roofing
The cost of maintaining or even replacing a roof is an expense that can catch new homeowners by surprise. Roofs require regular inspection and maintenance to help fix wear and tear, acute leaks, or storm damage. Factors like roofing material quality, weather conditions, and age usually determine how often repairs and replacements are needed.
Reroofing a house can be very expensive, costing you thousands of dollars. The average roof replacement cost in the U.S. is between $6,000 and $12,000. Being proactive about roof maintenance can increase the life expectancy of your roof and defer getting a completely new roof into the future [1].
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Periodic housing maintenance, like making sure gutters are clean and unobstructed and occasionally checking for damage, can prolong the life of your roof and reduce long-term costs. Set aside savings for potential roofing issues, especially if you are purchasing an older home or one in an area prone to severe weather.
Smart Tip:
Considering purchasing an older home? Ask the current homeowner when the roof was replaced, and factor that into your asking price. You can sometimes get home sellers to reduce the asking price by what it would cost you to replace the roof. When buying older homes, this strategy can save you thousands of dollars.
3. Plumbing
Plumbing issues can range from minor annoyances to major emergencies. If you are renting, you can simply call your landlord, but if you own your home, fixing plumbing issues is on you. Plumbing costs can be surprisingly high and are part of the homeownership experience.
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Common plumbing issues include leaky faucets, clogged drains, and, more seriously, burst pipes or sewer system backups. Older homes may have outdated plumbing systems and could require significant upgrades or replacements. Planning for these costs now will save you money in the future.
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As a homeowner, you need to think about regular plumbing maintenance at least annually. You should regularly check for leaks and proper drainage. Saving a contingency fund for unexpected plumbing emergencies is a must. Remember, even small leaks can lead to significant problems like water damage or mold growth over time, so addressing plumbing issues promptly is crucial in minimizing long-term costs [2].
4. Electrical System
Your electrical system is another critical, yet often overlooked, component of homeownership costs. Upgrading or repairing an electrical system can be expensive. For older homes, you need to make sure that your electrical system meets current safety standards. Issues like outdated wiring, insufficient power supply, and obsolete electrical panels need professional attention and can be costly.
Additionally, if you plan to add high-power appliances or technology to your home, you may need to upgrade the electrical system to handle the increased electrical load. Regular inspections by a qualified electrician can identify potential hazards and help prevent costly emergencies and you should probably do this annually. Investing in electrical system maintenance ensures safety (and helps detect potential fire hazards). It is a smart money move to be prepared for electrical expenses, particularly in older homes where electrical systems can be less reliable.
5. HVAC Costs
Heating, Ventilation, and Air Conditioning (HVAC) units are an essential piece of a well-functioning house, especially if you live in places like Texas or Florida. Paying for increased heating and air conditioning bills is one variable expense to homeownership. However, HVAC repairs and maintenance can sometimes come as a surprise for new homeowners.
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Your HVAC system requires consistent maintenance to run efficiently. Maintenance includes regularly changing air filters, cleaning ducts, and servicing the furnace and air conditioner. Neglecting these can lead to inefficient operation, higher utility bills, and the need for costly repairs.
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HVAC systems usually last around 15-20 years, after which they require replacement [3]. Depending on the size of your house and HVAC needs, a new HVAC unit can cost several thousand dollars. It’s critical to inspect your HVAC system regularly and budget for potential repairs or replacement. Doing this ensures a comfortable living environment and helps avoid unexpected financial burdens associated with HVAC failures.
6. Landscaping
Landscape expenses are evergreen expenses that catch new homeowners by surprise. Yard maintenance, such as lawn care, tree trimming, and garden upkeep, requires time, effort, and capital. If you want to take on lawn maintenance yourself, you need to factor in purchasing new equipment, fuel, and repair costs. Additionally, if your property includes features like a lawn irrigation system or large trees, maintenance costs can rise due to the need for specialized care or equipment. Landscaping is not just about aesthetics; it can also impact your home’s value and curb appeal.
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Investing in landscaping can enhance your property, but it’s essential to consider the ongoing maintenance costs. If you don’t want to do yard work, budgeting for a landscaping service is a must. Remember, a well-maintained landscape can affect curb appeal, and make your house more enjoyable for you and your family.
Best Savings Account for Hidden Expenses
Most of the hidden expenses of homeownership are only invisible to new homeowners. You can prepare yourself by regularly budgeting for these expenses and saving cash to meet the demands of home ownership. You should open a savings account to start funneling your savings into this account. Be sure to pick one of the best high-yield savings accounts to boost your savings with interest income or place funds in certificates of deposits. Earning interest on your savings will bolster your savings and help you outpace inflation.
Smart Summary
When you are house hunting, you can’t simply consider the cost of your mortgage when you are building your budget to determine if you can afford a home. Knowing how much you can afford before you start the homebuying process is extremely helpful, especially if you are a first-time homebuyer. Beyond the mortgage, contemplate all the costs associated with homeownership before taking the plunge. Going into any transaction with the full scope of costs is a smart money habit.
(1) U.S. News. What You Should Know About Roof Replacement. Last Accessed December 4, 2023
(2) U.S. EPA. A Brief Guide to Mold, Moisture, and Your Home. Last Accessed December 4, 2023
(3) Energy Star. What is it Time to Replace? Last Accessed December 4, 2023
