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Understanding The Real Cost Of Home Ownership

By 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:

One time expenses:

  • Down payment on the home (the higher the down payment, the lower your monthly mortgage payments).  This is building home equity however.
  • Real estate agent’s commission.
  • Principal and interest on closing costs.

Monthly expenses:

  • Monthly mortgage payment.
  • Annual property taxes (usually between 1%-2% of your home’s value depending on where you live).
  • Home owner’s insurance (about $25-$55 per month per $100,000 value of your home).
  • Private 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 requirement.
  • Maintenance 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.

Tax Breaks for Homeowners

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 repayments.

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 state.

Therefore, the total cost of home ownership can be calculated by adding all the expenses as mentioned here, and deducting the amount that you save on tax.

Intangible 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.

 

 

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