Harry N. Stout
287- How to Budget for Ongoing Housing Costs
The costs of home ownership usually make up the largest annual expenditure for most households. According to the Bureau of Labor Statistics, most households spent an estimated $21,000 annually for housing in 2020. A subscriber asked for my thoughts on how and what to budget for ongoing housing costs. In this post, you will see that there are a number of areas where, with a little focus, you can save your household money. I will not discuss the costs of purchasing a home or renting. In 2022, the cost to buy and rent are increasing dramatically and require a full post to address.
Here are the major ongoing housing cost categories and what you can do to manage them:
Mortgage and Home Equity Loan Payments
Mortgage and home equity payments are the way you finance your home purchase and major improvements. When you take out a mortgage or home equity loan, you agree to repay the loans over a predetermined amount of time (typically 15 or 30 years). Payments are usually made monthly — a portion goes towards your principal and the remainder is interest charges. Some lenders require you to pay your property taxes and your homeowner’s and flood insurance as part of the mortgage payment.
The biggest savings tip I can offer is that if you have not already, you should make sure that you are paying the lowest interest rates for all debt secured by your home consistent with the term of loan you need. Rates are still at very low levels from a historical standpoint and if you have not already looked to see if you should refinance, you should look into it.
Real Estate or Property Taxes
When you purchase something in a store, you normally pay sales tax. The same applies to homes. You are required to pay real estate or property taxes. This tax is levied by your local government and is usually based on your home’s valuation as assessed by the locality. Funds raised through property taxes benefit your local community and are used to fund public schools along with local services such as trash collection, parks and roads. This cost varies greatly based on where you live, but a typical homeowner pays around $2,300 a year in property taxes.
What a lot of people don’t know is that they can question the valuation their home is given by local taxing authorities and seek to reduce the taxes paid. Pay close attention as to how your home is valued versus your neighbors. If you believe there is an unjustified difference in valuation, contact your local tax assessor and ask about the process to address this difference. Valuation information can usually be found using the various real estate websites such as Zillow. I have done this and saved money.
One last major item is for homeowners aged 65 and older or who are disabled. Look into whether your locality offers tax breaks for these special circumstances. Many times there are tax exemptions or lower rates available.
Having insurance against fire, flood and other perils is usually mandated by your mortgage or home loan lender. As part of the mortgage process you will be provided with what coverage the lender requires. There are typically two main types of homeowner’s insurance: dwelling and personal property insurance. Dwelling coverage protects your house and personal property covers the items inside your house.
The price fluctuates based on your level of coverage and where your property is located. But on average, homeowner’s insurance costs around $1,200 a year. If you live in a flood prone area your lender will likely require that you purchase flood coverage in addition to basic homeowner’s insurance. When deciding on how much coverage to purchase, consider how much it would cost to rebuild your house instead of looking at how much your house is worth or replacement cost coverage.
Like all forms of insurance, it is good idea to shop around every few years to see if the price you are paying is reasonable for the coverage you have elected. Comparison shopping can save you money. For 2022, we are expecting a flood of rate increases — comparison shopping can help you offset the coming premium increases.
Private Mortgage Insurance (PMI)
If you make less than a 20% down payment when you purchase your home, your lender will usually require you to get PMI — and if you don’t pay for this coverage in full as part of your closing costs, you will likely have to pay it monthly.
You can stop paying this amount once you have 20% equity in your home. Getting to the 20% threshold can take place by paying down your loan or if the value of your home increases after your purchase is completed.
Homeowner Association Dues
If you buy property in a condominium or in certain communities, you’ll likely have to pay homeowner association (HOA) fees. This expense will typically run you between $100 and $1,000 a month, with the average being about $200 a month. In exchange, you’ll receive certain services such as maintenance and upkeep of any common areas or shared spaces, like a pool, gym or community center.
Maintenance and Repairs
Even if you don’t buy what’s referred to as an HGTV “fixer upper” — a house with significant repair needs — all houses need maintenance and upkeep at some point. Over the years, I have learned that you usually spend about 1% of your home’s value for this category annually. This amount covers normal items such as maintenance of your heating and air conditioning system and ongoing appliance repair. If you purchase an older home the annual ongoing costs can be much greater. What I have learned is that by maintaining your home on a regular basis you will save money in the long-term.
Home utilities for heat, light, power, water and sewerage can really cost you more than you thought. You should look to research ways to reduce these expenses for your home. I budget these amounts by asking the prior homeowner what they have paid for these services as part of the home purchase process and then manage them based on my family’s needs and usage patterns.
Improvements and Refurbishments
I know you do not want to hear this, but I think you need to budget each year for upgrading your home or refurbishing areas that deteriorate due to wear and tear. Examples include setting some money aside for new carpet or tile in high traffic areas. If you follow this suggestion, you will likely not have the large, unplanned item you must pay for.
The ongoing costs of homeownership are real. You cannot ignore them. I have learned that you need to keep your home properly maintained and functioning properly. For your heating and air conditioning systems to repairing locks and garage doors, you need to stay on top of things. The old adage of “you can pay them now, or later but you will pay them” is correct. Getting ahead of the maintenance and upgrade cycle usually saves money over the life of the home.
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