Real Cost Of Home Ownership
MySpendingPlan.com Editorial Staff
Many people who
pay hundreds of dollars each month on their rental homes or apartments
often think that they could just as easily buy their own homes and pay
the money that goes towards rent as their monthly mortgage. But what
you must understand is that the cost of home ownership does not simply
end with your monthly mortgage payment. The true cost of home ownership
involves much more.
Here is a look
at all the expenses that make up your total cost of home ownership:
payment on the home (the higher the down payment, the lower your
monthly mortgage payments). This is building home equity however.
- Real estate
and interest on closing costs.
property taxes (usually between 1%-2% of your home’s value depending
on where you live).
owner’s insurance (about $25-$55 per month per $100,000 value of
mortgage insurance (PMI). This kicks in only if you have paid less
than 20% of the value of your home as down payment. If your down
payment is in excess of 20%, you will not have to bear this expense.
You can also use a second mortgage to get around the PMI
costs. Since you will own the home, you will have to undertake all
the repair work and maintenance on your own. There is no landlord to
support you on this. Home maintenance costs vary depending on the
size of your home, but $100 is generally a good average amount to
set aside each month. Purchasing a home warranty can help here.
All these other
expenses that have to be paid in addition to your monthly mortgage
generally add to about 30% to 45% of your base mortgage. So when
calculating your total cost of home ownership, you should add about 40%
to your base mortgage payment and that is the amount that you will
eventually have to pay.
Of course, the
expenses we describe above can be offset by tax deductions available to
homeowners. If your home is less than $1 million in value, then you are
entitled to certain tax breaks. All the interest that you pay on home
mortgages under $1 million is tax deductible. The rate of deduction
that you effectively get depends on which tax bracket you fall under.
For instance, if you fall in the 30% bracket, you will get a 30%
deduction on your interest payments. The tax breaks apply only to the
interest component of your monthly mortgage and not to the principal
Apart from the
interest tax deductions, you may also be eligible for other deductions
such as property tax deduction. However, these vary from state to
total cost of home ownership can be calculated by adding all the
expenses as mentioned here, and deducting the amount that you save on
Benefits of Home Ownership
While it is
easier to calculate the financial impact of home ownership, you should
not focus on that aspect alone. Being a homeowner brings with it a
great sense of pride and gives you enormous stability and security
knowing that you will always have a roof over your head (assuming you
make your mortgage and tax payments!).
Everyone needs a
house to live in, so if you can afford to buy your own home, there is no
greater joy than being a homeowner.
To help you
determine whether or not you are financially ready to be a home owner,
you can make use of personal budgeting software which will help you to
calculate whether or not you will be able to bear the true cost of home
ownership every month.