Kali Hawlk

Financial Writer & Digital Marketer

What Banks and Realtors Won’t Tell You about Home Ownership

The “rent or buy” argument is one that will always  be rehashed time and time again. After all, it’s a constant issue because most people A. need somewhere to live and B. have to choose to own their own living space or simply rent it from someone else.

There are serious pros and cons to each of these options, and whether you rent or buy should be determined by your financial situation, long-term goals, and your priorities. For the sake of this post, however, let’s say you’re leaning toward home ownership.

Most folks understand the basic financial realities that are associated with buying a home. For example, instead of paying rent, owning a home means paying a monthly mortgage. You’ll also be responsible for things like upkeep and maintenance, rather than calling a landlord or property manager when something goes awry.

Your realtor may point out some properties have expenses like HOA fees associated with them that you need to pay monthly, quarterly, or annually, depending on the community. The bank you secure your mortgage with might mention stuff like closing costs. But there are additional expenses that you need to factor in to your decision on whether or not home ownership is right for you. Here’s what most real estate agents and lenders (or an online mortgage calculator, for that matter) won’t bother telling you.

What Exactly Your Mortgage Payment Consists of Every Month

Your mortgage payment isn’t just the amount of the money you borrowed divided up evenly over the 15 or 30 year period of your loan plus interest. Expect to pay the principle, interest, homeowner’s insurance, and taxes every month.

Your principle and interest will depend on the amount you borrowed from the bank when you bought your home. The larger the loan, of course, the larger the size of your monthly payment. Obvious stuff.

What might not be so obvious is that your homeowner’s insurance costs will vary depending on the kind of coverage your policy includes – and the size and location of your new home. The larger the house, the more the insurance company has to protect, and that means a larger monthly insurance payment for you. Location matters, too. How far away you are from a fire department, for example, will affect how much your insurance costs are.

Your taxes will vary, too. The more a house is worth, the higher the taxes on the property will be. Location is factor here, as well. Where we live, for example, we pay about $1,500 in property taxes per year. A house in a different region that has the same value as our home, however, may pay three or four times that amount.

You have to take way more into account than the amount of money you’re borrowing to get an accurate understanding of what your monthly costs will be. It’s way more than just a principle and interest payment, so don’t be fooled by mortgage calculators that say, “oh hey, you can afford this much house!” Well, technically I guess, but that’s assuming you’ll have certain insurance and tax obligations – and that assumption can throw these estimations way off.

Update: I love that this blog has so many smart readers! Nichole of Budget Loving Military Wife left a comment that pointed out a big omission in this post. She reminds us that “if a home buyer does not have 20% down payment, the PMI has to be factored into their monthly payment too… adding $100+” to your mortgage payment. PMI is private mortgage insurance, and will be imposed on your mortgage by the lender if you don’t put down the full 20%. This is to protect the lender in case you fail to make mortgage payments and fall into foreclosure – when you don’t have a 20% down payment, lenders consider you more risky, and therefore they require the PMI.

Home Ownership Doesn’t Mean Set Monthly Costs

When you rent, you’re subject to fluctuations in what you have to pay in order to keep renting your home. When we lived in our apartment, the cost of rent went up for us every single year. Market values and demand might cause your rent to rise and fall from year to year.

While you may think you won’t have to worry about these kinds of changes if you actually own your home, the reality is that your mortgage payment can fluctuate year to year in the same way. Your principle and interest payments won’t change (unless you choose to try and pay off your mortgage early), but your tax obligations can go up and down.

If your home gained value in the last year, you’re likely going to be paying more toward your escrow account in the following year to make sure you’ve put enough towards the next tax bill. Similarly, if you overpaid your escrow account, your monthly mortgage payment may go down. While lower monthly expenses certainly aren’t a bad thing, they can catch you off guard if your payment drops one year and rises the next – and you haven’t budgeted for that increase.

The Extent of Maintenance and Upkeep

Sure, you understand that as a homeowner, you’re responsible for replacing or fixing anything that goes wrong or stops working. But you also have the expenses associated with regularly maintaining every aspect of your home. For us, that looks a little something like this:

  • Annually: Clean gutters, pressure wash exterior parts of the house (siding, deck, driveway, and front walk), service furnace and have A/C units cleaned, have home inspected for termite damage as part of warranty.
  • Seasonally: Spray for bugs, treat lawn for weeds, wash exterior sides of windows, deep-clean carpets, limb up trees near the house, trim bushes, check attic to make sure nothing is making a nice cozy home up there.
  • As needed: Regular cleaning inside and out, replace old weatherstripping, repaint deck, repaint trim (inside and out), fix things that break because it seems like something falls apart every month.

All that stuff costs money out of your pocket – and that’s not really an exhaustive list, just what I thought of off the top of my head. For us, most of our regular maintenance comes in the form of taking care of the exterior of our home, since it’s a single-family residence (as opposed to something like a townhouse that might have an HOA that handles a lot of the exterior upkeep – with a bigger annual fee for doing so).

And don’t forget when you have to completely replace big ticket items. Things like furnaces, attic insulation, appliances, and even the roof of the house or the flooring won’t last forever. You are fully responsible for replacing major components of your home, and these can easily run into the thousands of dollars in terms of cost.

None of this is revolutionary. It’s all pretty common-sense, but it’s so easy to forget a few expenses here, a couple costs there, when you’re trying to determine if you’re financially prepared for home ownership. Be aware of these kinds of regular, recurring maintenance and upkeep expenses and be prepared to make room for them in your budget.

Now, the Upside!

With all that being said, I feel like this was a bit of negative take on home ownership. I don’t mean to dissuade anyone from pursuing that path – these are simply the financial aspects of home ownership that I wish I had fully understood before we decided to purchase our home. I don’t regret our decision, but we were super broke the first year that we bought our house because lots of unexpected expenses popped up! The more you know, the better you’ll be able to evaluate whether or not the pros of buying outweigh those of renting.

The best common sense advice for those wondering if they can truly afford home ownership is to always overestimate what your costs will be, and underestimate the amount of money you’ll have on hand to pay those costs. Don’t expect someone like your realtor or bank to sit you down and talk about these expenses with you. Do your research, work and rework your budget, and be honest with yourself about your price range before you head out the door and get on the road to home ownership.

36 Comments

  1. Being a tax preparation professional, I have to say that home ownership is over-rated. Too many don’t look at all the costs, including depreciation. That’s right, the house can go DOWN in value even after you’ve made all the payments. The tax advantage is only the difference between the standard deduction and the total of all your itemized deductions.

    • That’s definitely a good point, Mike – there is no guarantee that your house will gain value! We very well may not have bought at all, except that we got lucky on the timing and were able to get in when the market was near the bottom. We hope to sell our current house in the next 5-10 years and then spend plenty of time traveling. I’m not sure when we’ll purchase again. I definitely don’t look at homes as an investment. In my opinion, whether you rent or buy is more of a personal decision and should be based off what makes you happy (IF you can financially handle the increased responsibilities home ownership entails). Maybe I should do a post on that next! :)

      Thanks for your comment, Mike – I appreciate you sharing your thoughts.

  2. Great write-up, Kali! One thing people really need to realize before purchasing a home is that there are maintenance costs, as you pointed out. You will either need to perform maintenance yourself or pay someone else to do it. You can technically outsource all the maintenance-related tasks, but it likely will be relatively expensive. If you want a house I’d say make sure you have an emergency fund and make sure you are willing to spend at least some of your own time on upkeep.

    • Excellent point, DC – I totally agree that if you want to own your home, you should be prepared to spend some of your own time and energy on maintaining it. Always try DIY before hiring someone else to fix or maintain something for you!

  3. Just out of curiosity what are you yearly maintenance cost for your home?

    Were the unexpected expenses for the first year actually needed items or just improvements to make the house a home?

    You’ve raised a lot of good points that people should spend time considering when making the decision to by a home.

    • I can’t give you a hard number on yearly maintenance – I hope to be able to have those exact numbers on budget categories this year, though! With last year’s spending, everything got lumped into broad categories. I’m trying to be more specific and precise this year for this very reason, so I can know exactly where every cent of our money goes throughout the year.

      Our unexpected expenses were partly due to the fact that we underestimated a little what our costs would be in general. With it being our first home, I think it was just a little bit of a learning curve – learning what we needed to take care of in a house versus an apartment. This was at a time where our income was lower, too, so a $20 bottle of bug spray had to be carefully planned and budgeted for. It wasn’t like we could just run out to Target or Home Depot to grab little things like that without worrying about the cost. We knew we’d have to spend more money on maintaining the house, we just didn’t realize just how much that would be on a regular basis.

      Other costs were big unexpected things. Our first winter in the house, the upstairs furnace died and had to be replaced. Our realtor had given us a home warranty when we bought the home, so we didn’t have to foot the entire bill, but it was still $900 out of pocket.

      We certainly weren’t spending on things to make it feel like home. Half the house didn’t have furniture for over a year and the things we did have were all very basic – everything had a purpose, there wasn’t anything decorative. And of the furniture we have today, the 98% of it is hand-me-downs from family and the rest of it is furniture my husband actually made.

      All that being said, I will be the first to admit that when it comes to whether or not we were financially 100% capable of handling the responsibility that comes with home ownership, I think we passed but barely. We definitely squeaked by, but I also think we had good reason. We wanted to take advantage of the fact that the housing market (at the time we bought, and in our region) had not yet started to recover. We were able to get in at a very low price, and even though it stretched us at the time we bought, we’ve been able to catch up since :)

  4. So many people do not think about the whole mortgage payment when they get a new home. We have been looking at a few homes and have fallen in love, only to look at their annual property taxes and want to faint. The same house with the same price in just another town over can sometimes have property taxes 3 or 4 times higher, which can be the difference of a few hundred dollars each month.

    • Good for you guys for taking the whole picture into account! That’s crazy that homes just a town apart can differ so much in property taxes. Good luck in finding something that you both love – and that has reasonable costs associated with it!

  5. Great article, thanks for sharing! Also, if a home buyer does not have 20% down payment, the PMI has to be factored into their monthly payment too… adding $100+

    We are currently renting because we live overseas, but have renters in our state-side mortgaged house. Not only does the $$$ add up with maintenance/repairs but so does the time it takes! After living in our house for 2+ years and having constant maintenance and improvement projects and spending most of our weekends working on our house. Now as renters, we wonder what to do with all our extra time. LOL. So if I if you are thinking about buying a house but have a very busy lifestyle. You might want to reconsider.

    • I’m so glad you mentioned this! This is a biggie that I left out – if it’s alright with you, I’ll add in a little update to the post and credit you with the addition.

      You bring up another excellent point as far as a home is not just an investment of your money, but your time, too. Thanks so much for commenting, Nichole – you added a lot of value to this post and I appreciate it :)

  6. This is actually why I’m totally for renting right now and for the forseeable three to five years. I jumped into home-ownership without having a great handle on the numbers (yeah, my fault I know) and so as a result, I always felt like these things were catching me off guard. My rent (including heat/HW/electricity) is equivalent to the mortgage payment only. So property taxes, maintenance, utilities would all be on top of that.Why not have that money freed up to save/repay debt (which we’re actually doing!).

    I’m also a bit leery of buying again (especially in my new locale) because of the trouble we had selling in a much better market. We couldn’t sell even to break even, hence the income property (which thankfully carries itself), but I think it would be 10x tougher here. So unless my financial situation is much stronger (which it will be in two years, let alone five) I am not taking on home ownership. Plus, I HATE doing maintenance! :) I do it because otherwise the place gets run-down, but I am just not very handy.

    • I love that you’re honest with yourself and have really analyzed your situation in order to determine which was better for you. I think too many people get caught up in worrying about what you’re “supposed” to do rather than what is actually best to do. I’m not sure what we’ll do once we’re ready to move on from this house – we certainly won’t buy something immediately after, since we plan to travel extensively in the near future. I think we’ll be ready for a break from the responsibility that comes with home ownership!

  7. I actually had a long chat with a client about this last week who was trying to determine if she should buy a home or not. I always remind my clients about the costs that are unforeseen but inevitable. Banks and realtors only make money when you buy a home so of course they want to encourage you to do so. I care about my client’s long term financial health and home ownership comes with costs and responsibilities that are not always outweighed by the benefits.

    • Love how you put that, Shannon – “unforeseen but inevitable.” Ain’t that the truth! I agree that while there are benefits to home ownership, they don’t always outweigh the cost (both financial and in term of your time and energy). There’s so much that just depends on given situations and circumstances, so it’s always wise to run your own numbers.

  8. I agree with you on the fact people forget the hidden costs of buying a house. Sigh, I think even we underestimated it. I’m glad we bought a more affordable house than most. Our expenses monthly alone have gone up by $500 each month. That’s about how much we pay in principal every month on our mortgage. But we did need more space. When my family would come to visit, our 1 bedroom apartment just could no accommodate people.

    • I totally understand – it’s really, really hard to get super accurate when estimating your costs on a new home (especially if you’ve never owned before). There’s just so much that is different! It was certainly a learning curve for us when we first bought.

  9. Home ownership is expensive. In our first year, we had to buy a new toilet and installation, new washer and dryer and got our wood floors buffed and coated. These were all necessities and there are plenty of other things that need to get done! I think estimating the costs to be roughly 1% of the purchase price PER YEAR is a good starting place. Now into our second year of home ownership I am sure we will spend this at least and more if we have to get a new AC unit this summer. Home ownership isn’t cheap but I love being a property owner : )

    • I definitely relate – it’s not cheap but I’ve been much happier with our own little place than having to rent from someone else (and I’m not a fan of living on top of everybody else like you do in an apartment).

  10. The one that really surprised me when we bought our first home was the fact that your payments are NOT fixed as I thought they would be- ours usually goes up by a little every year since the house increases in value, property taxes might go up, etc. This has been an issue both with the home that we live in AND our rental property. We have to take into account the fact that our costs will likely rise every year and we need to be raising the rent accordingly to accommodate for that.

    • That one definitely didn’t occur to me at first, either. It’s good, in a way, because the value of your home is increasing.. but it definitely sucks having to pay more and more every year!

  11. Great overview, Kali. I agree that the reality of homeownership costs aren’t often outlined by the people who are facilitating your loan. I’d love for there to be a standard handbook provided to all loan applicants, outlining these sort of things.

  12. In NYC, maintenance fees are a set amount in every building. Most of them are more than my monthly rent, so it doesn’t make seem to make sense to buy.

  13. I have friend who actually separated the mortgage payment and her property tax payments when she did her refinance. She just couldn’t handle the ups and downs of the mortgage with an escrow. I think the first year is the hardest when you are first time home buyer. After going through the learning curve my second year feels better. Financially speaking I feel more at ease each month with my new budget. It’s important to know these things though because homeownership cost more than just paying your mortgage.

    • It’s definitely a good idea to know as much as you can ahead of time – but I think there’s still going to be that learning curve you mentioned, no matter what. It’s just a totally new experience, so there’s bound to be some surprises. But making sure you’re as prepared as possible will certainly ease the burden :)

  14. I definitely don’t feel prepared for home ownership. There are a lot of costs associated with owning a home, many of which I was a witness to when my parents had to shell out money for repairs and upkeep. I remember my mom saying the mortgage was going up yet again because taxes were increasing. I think the property taxes here are the number one reason I could never afford it. The average is probably around $8,000. No thanks! Renting is the path we plan to take for the next few years.

    • It’s definitely frustrating when your mortgage payment goes up because of taxes. On one hand, it’s good to know someone else thinks your home is more valuable! But on the other, I think it’s a common misconception that with a house your payments never change – and that couldn’t be farther from the truth. I think it’s awesome that you’ve been honest about what you want and what you can financially handle, and have chosen a situation that makes sense for you :)

  15. We just paid $5k buying a new furnace, so I know all about those “unexpected” home-ownership costs. Fortunately we had a good sized e-fund so it wasn’t money we didn’t have, but I certainly would have preferred to spend that money elsewhere (or had my landlord replace it!).

    • Ugh, I know what you mean – those kinds of expenses, even if you have the money for it, really hurt because it’s certainly not fun (even if it’s totally necessary). I’m sorry you guys had to deal with that, but glad that you did have your e-fund to help you through it!

  16. “The best common sense advice for those wondering if they can truly afford home ownership is to always overestimate what your costs will be…” I could not agree more Kali! I remember our first year of home ownership and thought “when is the gravy train going to end?” as it seemed like there was always something that needed taken care of – and that’s just the things that pop up. That said, home ownership can be great, but you have to be prepared for it, otherwise it could be one headache after another. As an aside, I love Warren Buffet’s advice on mortgages and mortgage paperwork – have all mortgage agreements be one page in length, as opposed to the tree killer agreements they are, so they’re easy to understand and people have a better grasp of what they’re getting themselves in to.

    • That pretty much describes our first year as homeowners, too – it was just one thing after another after another! And I wholeheartedly agree, mortgage agreements should be much, much easier for people to understand. But I reckon that won’t happen, as it would put a lot of lawyers out of work..

  17. Other costs include buying nicer furniture because you now own. My wife wants to do all these projects around the house like the closets that cost a lot of money. If we rented no way would we do that. The first year we were bleeding cash, which is usually the case when you purchase a home.

    • We definitely debated the furniture thing for like, a full two years. Okay, okay, I advocated for new furniture – it wasn’t a “we” thing, as my husband was perfectly happy with the old furniture we had. At this point, I’m glad he stood his ground on that one – it saved us a lot of money. And you’re right, seems like that first year all the cash just flies right out the window!

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