How to Prepare for 6 Often Overlooked Costs of Home Ownership

Ready to make the leap from renter to homeowner? Your immediate considerations may be finding a property in your price range and saving enough for the down payment.

But buying a home should also involve making sure you can afford the long-term costs of ownership. Once you become a homeowner, you’ll quickly discover many financial responsibilities you may not have planned for. These expenses might come up monthly or annually, or they could be unexpected. For example, what if the furnace dies years earlier than your home inspector estimated?

Read on for more information about a critical first step for any prospective home buyer, as well as ways to manage some additional, hidden costs of homeownership.

1. Mortgage interest

Before the house hunting begins, you’ll need to make sure your credit is in good shape because that determines whether you’ll qualify for a favorable mortgage loan interest rate. That’s important because a portion of your monthly mortgage payment goes toward interest, and a higher rate can add tens of thousands of dollars to the cost of your mortgage over time.

Review your credit reports from each of the three credit reporting bureaus by getting a free copy at AnnualCreditReport.com. Bring any overdue accounts up-to-date and correct any errors in the report that could damage your credit score, a measure of creditworthiness. Next, check your FICO score, which is widely used by lenders. The higher the score, the lower the interest rate you’ll likely be offered.

The bottom line? Even small improvements to a credit score can have meaningful results. For example: As of early February 2021, a homebuyer with a 695 FICO score could qualify for a 30-year, $300,000 mortgage at a fixed rate of 2.76%, according to MyFico.com. By increasing the score to 700, the borrower could receive a rate of 2.58% — an interest savings of $10,068 over the mortgage term.¹

2. Property taxes

Your property tax will be based on your jurisdiction’s property tax rate and the assessed value of your home. Tax bills differ widely across the country, but you can count on paying hundreds – if not thousands – of dollars each year. New Jersey, for example, has the highest median property tax rate at $2,417 per $100,000 of assessed value.² Hawaii ranks lowest – $280 per $100,000 of assessed value – but it also has the highest median home price, which can push up tax bills.

The good news? Many jurisdictions restrict how much property taxes can rise. And as a homeowner, you will be able to appeal your assessed home value if you think it’s too high compared to comparable houses in your neighborhood.

3. Utilities

These costs can eat up a big chunk of a homeowner’s budget. On average, homeowners spend nearly $400 a month on utilities, which includes water, trash, electricity, gas, cable TV and internet service, according to Move.org.³ That’s far higher than the $100 to $150 that the average renter pays each month.

There are many ways to lower your utility bills. Here are some money-saving tips:

• Wash clothes in warm or cold water, not hot.
• Reduce the temperature on your water heater.
• Replace dirty air filters regularly so your heating and cooling system works more efficiently and lasts longer.
• Install a programmable thermostat that allows you to control the temperature in the house and your energy usage when you’re sleeping or away.
• Look for energy-efficient appliance models that can further lower your utility bills.

4. Maintenance and repairs

Homes require continuous upkeep, and the older the house, the more maintenance is required. Some maintenance is routine and anticipated, such as yearly gutter cleaning, seasonal lawncare or snow removal, an annual heating and air conditioning inspection and service, or a periodic fresh coat of paint for interior walls. But other maintenance is unexpected – and often expensive – such as roof damage from a tree branch or a water heater that springs a leak.

To handle routine and unexpected expenses, create a home maintenance fund that’s separate from your other savings. A popular guideline is to set aside 1% of your home value each year that you can tap as needed to make repairs or replace appliances. On a $300,000 home, for example, you would salt away $3,000 annually.

5. Homeowners insurance

The average annual premium is $1,249 for the most common policy, although prices vary widely, according to the National Association of Insurance Commissioners.⁴ Premiums, for example, are higher in areas that are prone to natural disasters or in heavily populated locales that tend to have steeper construction costs. And the amount you pay may also be tied to the size and age of your home, as well as whether it’s brick or more flammable wood.

Each insurer has its own criteria for setting rates, so it’s wise to shop around for the best price. As you compare, consider these ways to reduce premiums:

• Choose a higher deductible and avoid making small claims. The standard recommendation is a $500 deductible, but you can save as much as 25% off your premiums by doubling the deductible to $1,000, according to the Insurance Information Institute (III).⁵
• Add safety features, such as smoke detectors, deadbolt locks on doors and an alarm system.
• “Bundle” your insurance, which is buying more than one type of policy from the same insurer. Buying auto and home policies from the same company, for example, can trim five to 15% off the cost of insurance, according to the III.
• Maintain good credit. Most states allow insurers to use credit scores as a factor in setting premiums.

6. Often Overlooked Costs of Home Ownership

If you buy a condominium, townhouse or even a single-family home in a community with shared amenities, such as a parking garage, clubhouse or swimming pool, you’ll likely owe an HOA membership fee. Designed to cover regular maintenance of communal areas, it also builds a reserve fund to take care of major or emergency expenses, such as repairs after a tropical storm. Monthly homeowner or condominium fees average $170 nationally but vary widely depending on the size and location of your home.⁶

Ask about the history of HOA fee increases before buying a property. And, with the help of your real estate agent or financial advisor, make sure the property’s reserves are adequate. You don’t want a major expense to wipe out the reserve fund right after you purchase the property, possibly forcing you and your neighbors to kick in more money to cover any shortfall.

Protect your investment from loss of income

What happens if you carefully considered all the potential costs of homeownership, but then suffer a disability or death in the family that causes a drop in household income? It’s not as uncommon as you think: 43% of all current 40-year-olds will be disabled for three months or more by the time they’re 65, according to a recent study by the Council of Disability Awareness.⁷ What’s more, the average length of a disability absence from work is three years, the study reported.

You can protect against this possibility by making sure your family has adequate disability and life insurance. A disability income insurance plan, for example, can replace 50% to 70% of your income if you’re sick or injured and unable to work. If you become sick or injured and can’t work, you’ll receive a monthly benefit that helps replace a portion of your lost income. That way, no matter what happens, the housing bills are paid.

Prepare for financial security by determining your unique needs with our life insurance calculator and disability income insurance quote.

Learn more about how disability insurance and life insurance can help families protect their largest asset – their home.

The information provided is not intended to be tax advice. Consult your tax advisor to determine the tax benefits for your business.

¹ MyFICO Loan Savings Calculator, using national interest rates as of Feb. 4, 2021.

² State-by-State Guide to Taxes on Middle-Class Families, Kiplinger.com, November 2020.

³ Utility Bills 101: Utilities Tips, Average Costs, Fees, and More, Move.org, January 2021.

⁴ Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2018, National Association of Insurance Commissioners, 2020.

⁵ Twelve Ways to Lower Your Homeowners Insurance Costs, Insurance Information Institute, accessed Feb. 4, 2021.

⁶ American Housing Survey-National Housing Costs, U.S. Census Bureau, 2019.

⁷Council for Disability Awareness, www.disabilitycanhappen.org, 2018.

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