Do You Know the Real Costs of Home Ownership?
August 15, 2016How much does owning a home really cost? It’s more than you think it will. Owning a home requires more financial resources than just paying the mortgage. You must be prepared to make an ongoing investment in the care of your home. If you are thinking of buying a home or just want to plan better for the costs of keeping up your property, take this quiz to test your home ownership savvy:
1. What kind of damage does a standard homeowner’s insurance policy cover?
a) sewer back up
b) flood
c) termites
d) none of the above
Answer: d Homeowner’s insurance is designed to cover events that are sudden and accidental, not things that could be prevented with routine maintenance, such as pest control or inspecting a sewer line for tree roots. In addition, standard homeowner’s insurance policies do not cover floods, but flood insurance may be purchased from the National Flood Insurance Program. Many homeowners find this out the hard way after a problem has already occurred.
Review your homeowner’s insurance once a year to make sure you’re covered for your risks. For an additional premium of $50-$400, you may be able to add coverage for certain perils to your standard policy. If you are considering buying in a flood region, keep in mind while flood insurance averages $700 per year, premiums can be exponentially higher if you live in a very high risk area. Make sure you keep additional cash reserves in the amount of your homeowner’s insurance deductible as part of your emergency fund.
2. The average annual cost of a home repairs and maintenance is:
a) one half of 1 percent of the home’s value
b) 1 to 4 percent of the home’s value
c) $2500
d) $1250
Answer: b What will you do when the furnace breaks, the roof leaks or you need to replace a washing machine? Don’t forget to look at maintenance costs before leaping into home ownership. For a $250,000 property, that means budgeting $2,500 to $10,000 for home repair and maintenance costs every year.
While it’s difficult to predict what is going to need repair or replacing during the year, count on the fact that something is going to require work. Have a brand new home with new appliances? You can probably get by for the first decade by reserving 1 percent of your home’s value in liquid savings to meet repair/maintenance expenses. Got a 150 year old house? You may find that maintenance and repair costs closer to 4 percent of the home’s value per year.
3. How much more will a mortgage cost if you have fair to good, but not excellent, credit?
a) .25 to 1.5 percent more than the rate of borrowers with high credit scores
b) .25 percent less than the rate for borrowers with high credit scores
c) the same as the rate for borrowers with high credit scores
d) people with fair credit scores will find it very hard to get a mortgage
Answer: a The average FICO score for U.S. borrowers is good but not excellent, at 695. At current rates, a borrower with that score would pay about four tenths of a percent more than a borrower in the highest tier of credit scores. According to this calculator for a $200,000 fixed rate 30 year term mortgage, the borrower with the average FICO score would pay $15,768 more in interest over the life of the loan given current rates – about $44 more per month. Try this mortgage loan comparison tool to compare mortgages.
4. Maintaining the land and gardens surrounding my home is likely to require regular:
a) tree trimming and removal
b) lawn care, such as buying a lawnmower and garden tools or paying a landscaping service
c) investments in plants, bushes and other garden features
d) all of the above
Answer: d If you have outdoor space, maintaining the lawn and garden is an important component of your home’s value. Doing all the work on the lawn and garden yourself is cost effective, but it will still cost money for equipment, plants and outdoor furniture, so make sure to include that in your annual budget. If you plan to hire help, expect to pay $40-$120 per visit for landscaping and lawn care, depending on where you live and the size of your property. Tree care is not something people can usually do on their own, so if you have large trees, make sure to budget for a tree service. The cost of trimming or removing just one large tree could be as much as $500 to $1000 because of the hazards involved.
5. When buying a home, homeowners generally spend how much on furnishing their new space:
a) $15,147
b) $3,895
c) $5,288
d) $9,733
Answer: c According to a National Association of Home Builders study, new home buyers spent $5,288 on furniture in the first year after buying a home built in 2004 or later. Many homebuyers fail to budget for what it will take to turn their house into a home that meets their personal aesthetic. It is unrealistic to think you won’t want to make changes. Expect that you will want to personalize your new space with paint, furniture and accessories and include those costs in your home buying budget.
Do you have questions or comments about the costs of home ownership? Email me at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.