Homeownership is a rewarding, life-long investment. But let’s be practical, buying a home has costs with some of them out in the open like down payment. Still, other costs can be hidden because they come in later when you have closed the loan.
It’s never too late to prepare for these so-called hidden costs of homeownership as knowing about them beforehand can help you deal with them as they come.
4 Hidden Costs of Homeownership
The four hidden costs that a homeowner faces are:
- Mortgage insurance. It becomes a requirement when your down payment goes below 20%. Find out how you can get rid of PMI.
- Homeowners insurance. This is a primary requirement in any mortgage transaction. While you can’t get rid of it for as long as the mortgage is there and it’s better to keep it, there are factors that could help you lower your premiums.
- Property taxes. Real estate taxes, together with homeowners insurance, make up the four main components of your monthly mortgage premium. It’s in your local tax jurisdiction to levy these taxes but you can do something to cut this expense.
- Maintenance costs. Except for reverse mortgages, homeowners are not strictly required to maintain their home. But for as long as you own the home, you are responsible for its maintenance costs.
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Mortgage insurance – PMI (private mortgage insurance) on a conventional loan or MIP (mortgage insurance premium) on an FHA loan – is required by lenders on low down payment loans. This protects the lender in case you default on your mortgage.
Mortgage insurance premiums are paid (i) upfront, (ii) upfront and per month, or (iii) most commonly, every month. If the premium is added every month, you can see this MI broken down along with other closing costs in your Loan Estimate.
Actual MI costs vary but they nonetheless add to your closing or ongoing mortgage costs.
Here are some things you can do to get rid of PMI. On FHA loans, the discontinuation of MIPs depends on your case file.
- You can ask the lender to drop the PMI if your home has reached 80% loan-to-value ratio. If it reaches 78%, the PMI will be automatically canceled.
- You can ask the lender to pay the PMI on your behalf at closing. This eliminates the need to pay any mortgage insurance but the mortgage rate is usually higher to balance things out.
- You can take out a VA loan. VA-backed loans don’t have mortgage insurance; they do have an upfront funding fee that serves as a guaranty fee.
- You can take out two mortgages: one mortgage covering 80% of the purchase price and another loan, usually a second mortgage, makes up for 10% of the down payment. The remaining 10% will be your main down payment.
- You can refinance your existing mortgage with PMI to get rid of it. Just be sure the refinancing costs outweigh the mortgage insurance premiums.
A homeowners insurance protects your home from man-made and natural calamities. Lenders usually require it if you have a mortgage. But even if you own the home outright, it’s always best to have it with you when fire strikes or someone gets injured in your property.
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Floods, earthquakes, and even fires, to some extent, are not covered by basic homeowners insurance. Each of these events can entail a separate policy. This leads us to the cost of getting or keeping one.
Homeowners insurance rates vary by state and a number of factors that could weigh the costs down in your favor, such as (i) the age and condition of your home; (ii) the price of a rebuild in case it gets damaged by flooding; (iii) the existence of safety features and dangerous amenities; and (iv) the borrower’s age, credit score and other personal information.
Just like with mortgages, the best way you can land a good deal on homeowners insurance is to shop and compare quotes. You can call up a number of insurers, or better yet, look them up online and get a quote in 90 seconds or less.
How much you’ll be paying in real estate taxes would depend on the value of your property, as assessed by the local or municipal taxing authorities.
Effective tax rates levied on single-family homes differ greatly from Hawaii to New Jersey.
Taxes are calculated every year and depending on your curb appeal and improvements, could increase.
Because taxes are inevitable even after you’ve paid off the mortgage on your property, your best option is to shop in areas with low tax rates.
Just like property taxes, your home’s maintenance is your responsibility regardless of whether you have it mortgaged or not.
From the pipes to the sinks, however menial or mechanical, there’s no else to call and foot the bill but you. Of course, you can do some of the easier tasks like mowing the lawn and pruning the bushes.
By maintaining your home, you preserve its appearance and thereby increase its resale value.
Maintenance is also an important aspect of your homeowners insurance with some claims arising from maintenance-related issues not paid out by your insurer.
While there’s no way around maintenance costs, what you can do is to ensure that everything is working by doing a routine maintenance check.
Are you ready for homeownership?