I just lit the pilot light on the water heater for the third time today, as I’ve done for months. My wife and I are delaying the hassle (and $800 cost) of getting a new water heater installed.
I suspect the air conditioner will go next ($4,000), since A/C problems seem to be our personal homeowner curse. We’ve repaired or replaced air conditioners in half of the six homes we’ve owned in the last eight years.
If you’re a first time home buyer you might not know how common these problems are, or how many routine expenses you’ll face monthly and annually. In fact, most people underestimate the amount of money, time, and work it takes to buy and maintain a home.
So are you ready to own a home? To help you decide, here are six questions to think about before you make what will probably be the biggest financial decision of your life.
1. Do You Have Enough Money for the Upfront Costs of Buying a Home?
Do you have enough money saved for a down payment on a house? If not, you might be happy to know that despite the lessons of recent history, zero-down mortgages are coming back.
But these loans may get you into trouble. They have higher loan costs and interest rates, so you’re buying into decades of higher housing costs.
Also, the down-payment is not the only upfront cost you’ll have when you buy a home. Let’s look at some other things you’ll have to pay for before you spend your first day in your new home. These include…
- Prorations of property taxes, dues, and other expenses
- Various closing costs
- Deposits required by utility companies
- The first payment on your homeowners insurance
- The cost of moving
- Necessary appliances
- Necessary homeowner tools (lawn mower, rake, ladder etc.)
You can easily face thousands of dollars of upfront expenditures when you buy a home. If you don’t have enough saved to cover those and the down payment for whichever loan you choose, you’re not ready yet.
2. Are You Ready for the Ongoing Cost of Owning a Home?
You may know the acronym “PITI,” which stands for “principal, interest, taxes, and insurance.” Real estate agents and lenders toss the term around as though it represents the total cost of owning a home. Now that’s a pity — with a “y”.
The true cost of homeownership includes many more expenses. Here’s a more complete list of the expenses you may face:
- Mortgage payment
- Property taxes
- Hazard insurance
- HOA (homeowners association) dues
- HOA special assessments
- Special tax assessments
- Natural gas, propane or heating oil
- Garbage collection
- Lawn care
- Routine maintenance
- Unexpected repairs
- Improvements and updates
- Security services
Not every home comes with all of these expenses, but many come with most of them. So can you handle the load? To determine that you need to know what it all adds up to..
Some of the numbers are easy to find. A mortgage calculator will show you what your principal and interest payment will be on a particular loan amount. You can ask the real estate agent about the current property tax rate and HOA dues. You can even get an insurance quote before you make an offer if you’re uncertain about rates.
Other numbers will be educated guesses. You can ask around about utility costs, for example, but your own bills may differ from those of your neighbors. Routine maintenance and lawn care costs are tough to estimate, but make your best guess.based on how nice you like to keep your home.
Estimate everything on a monthly basis. Divide annual expenses (taxes, insurance) by 12 to add those to your tally.
The cost of big repairs are trickier to calculate. For example, a $600 water heater that lasts 10 years would add $5 per month to your tally ($600 divided by 120 months).
Or skip the detailed calculations and use a percentage. Some suggest that the annual cost of maintenance and repairs will be 1% of the purchase price, while others recommend using 4% for your estimate.When I calculated the annualized short and long-term maintenance costs of a home we owned in Florida it came to 3% of what we paid.
Again, divide the annual figure by 12 to add it to your monthly tally. Once you total your list of expenses you’ll have a better idea of whether your monthly income is enough for you to handle owning a home.
Having enough income is necessary, but it still doesn’t mean you’re ready to own a home. You also have to know how to handle that income, which brings us to the next question…
3. Are You Prepared for the Surprises?
When we moved to Florida the air conditioner in our condo died the first year. The new one cost $4,200. We later moved to a house and in our second month there we paid a $1,100 repair bill for the air conditioner. You might think that’s bad luck, but it’s just a normal part of owning a home.
Those are examples of the “known unknowns.” You know every appliance or system will need repairs or replacement eventually, but you don’t know when. You can estimate the cost of these “unexpected” repairs and save for them.
Then there are the “unknown unknowns,” like special tax assessments, or sudden increases in certain expenses. These are harder to plan for, since you don’t even know if they’ll come, what they’ll be, and how much they’ll cost.
For example, a few months after we moved into that condo the HOA imposed a $600 special assessment because they ran short of money to repair roofs. Hurricanes (and insurance rate increases that result) are unpredictable as well. Then there is our friend in Colorado who, a few weeks after buying his new home, discovered foundation problems that cost $25,000 to fix.
Do you routinely save money and do you have an emergency fund of some sort? Do you have available credit to pay for anything your cash won’t cover?
Let’s say you make enough to afford the house, and even with expensive surprises, you’ll pay less to own than to rent when averaged out over twenty years. Those facts still don’t answer the question:
Can you handle those big surprises at the moment they happen?
4. Are You Ready for the Work and Stress of Owning a Home?
Homes are usually more work than you think. When we bought a house in Florida I was amazed by the amount of time it took to tame the yard during the rainy season.
Since repair decisions belong to the owner of a house, you own the associated stress as well. For example, my wife’s grandmother arrived from overseas just as the air conditioner died, so she sat there in the 95-degree indoor humidity for days while I argued with a home-warranty company about how much of the repair costs they would cover (not much — I’ll never buy a home warranty again).
Of course, the amount of work and stress is related to the specific home you choose. I find that condos, for all of their disadvantages, are a less work and stress than houses. With that in mind, look over the following list of things you might have to do as a homeowner:
- Buy landscaping materials
- Mow the lawn
- Trim trees and bushes
- Water flowers and grass
- Shovel snow (in the north)
- Clean and stain decks
- Clean outside walls or pay to have it done
- Paint outside walls or pay to have it done
- Repair plumbing and appliances or pay to have it done
- Shop for affordable homeowners insurance
- Pull permits to install fences
- Replace shingles after a windstorm
- Argue with tax authorities if your property tax is too high
- Dig a trench to divert floodwaters away from the house
Yes, I did that last item, along with everything else on the list, and more. What about you? Are you ready for the work and decision-making that comes with owning a home?
5. Are you Ready to Settle Down?
Do you want to live somewhere warmer, or move to where there are better jobs? When you rent this is easier to do. At worst you might have to pay to break a lease.
When you own a home it can get more complicated. For example, I know people who are upside-down on their mortgages (they owe more than the homes are worth). They can’t move without walking away from their loans and wrecking their credit.
In general it takes more time and effort to move when you own. You have to prepare your home for sale, find an agent, and wait for a buyer. And then you wait to close; our last home sold in one day, but it took 10 weeks to close.
You also face a large potential loss if you move too soon. You have costs when buying, and the transaction costs of selling can be as much as 10% of the selling price. Unless values have risen quickly you may lose money when selling a house you’ve only owned for a couple years.
In other words, if you aren’t fairly certain you’ll be settling down for at least several years, you’re probably not ready to own a home.
6. Does it Make Financial Sense to Own a Home?
Even if you’re ready, should you buy a home? Does it make financial sense?
The usual “rent versus buy” financial calculations are part of this question, and those depend on the specific rental and purchase options you’re comparing. We’ll save a full explanation of that for another article.
But there are other considerations, so here are a few relevant questions to get you thinking about whether you’re ready to buy a home and whether it makes financial sense:
- Do you like the place where you currently live?
- Do you see yourself living there in five years’ time?
- How likely is it that you’ll have better jobs opportunities elsewhere?
- Have you compared all of the costs of renting to all of the costs of owning?
- Is it likely your area is near the top of a speculative real estate bubble?
The answer to that last question kept us from buying a home here in Tucson, Arizona in 2006. Friends who bought homes saw the value of those homes decline for years afterward.
We returned to Tucson last year and bought a freshly-painted condo for $55,000 which would have cost $85,000 ten years earlier. Sometimes it pays to wait.
Please share your own home ownership stories below… and keep on frugaling!