Relatively low mortgage rates have sparked renewed interest in homeownership, particularly among young people who are frustrated with rising rent costs and are drawn to the idea of building equity in their homes. Owning a property can be a valuable asset and a step towards a more secure financial future. However, new buyers may be surprised by the additional expenses that come with homeownership.
Beyond the monthly mortgage payments, owning a home involves several hidden costs. The first three are routine and unavoidable, while others are occasional and unpredictable, which can add to the stress. Being prepared for these expenses is crucial.
Property Taxes
As a homeowner, you’ll be responsible for paying property taxes, which are set by the local township, city, or county—not the bank. These taxes, based on the value of your home, can range from $500 to $1,000 or more each month.
The average property tax rate across the U.S. is 1.1% of your home’s assessed value, but this rate varies significantly by state and locality. For example, Alabama’s average rate is under 0.4%, while New Jersey’s can be around 2.2%.
Property taxes are a continuous expense, and while you may not have much control over the amount, there are strategies available to potentially lower them.
HOA and Condo Fees
If you purchase a property within a homeowners’ association (HOA) or a condominium association, you’ll be required to pay a monthly or quarterly fee. This fee typically covers services that benefit the entire community, such as garbage collection or snow removal.
HOA fees can increase over time, and the association may also impose special assessments for projects like repaving the parking lot, installing a new security system, or updating common areas and buildings.
Homeowners Insurance
Homeowners insurance is a standard expense that banks and mortgage companies require before issuing a loan. Usually, the premiums are included in your mortgage payment and paid from your escrow account, similar to property taxes.
However, be aware that insurance premiums can increase annually or if you raise your coverage to match the rising value of your property or belongings. Additionally, standard homeowners insurance typically does not cover “acts of God” like floods, hurricanes, and earthquakes, which means you may need to purchase additional coverage for these types of disasters. Water damage from storms is also often excluded from basic policies.
Extra insurance for these risks can be costly. For example, as of 2021, the average cost of flood insurance was $708 per year, but this can vary significantly depending on your home’s proximity to the coast.
The Heating, Ventilation and Air Conditioning (HVAC) System
You’ll likely need to replace HVAC units eventually as they wear out over time. Regularly changing the furnace and air conditioner filters helps keep these systems running efficiently.
It’s important to have your HVAC systems inspected at least once a year. Many companies offer service contracts or maintenance plans that can lower the cost of annual inspections, provide semi-annual check-ups, and offer benefits such as discounts on parts and reduced rates for emergency visits.
The Electrical System
Arc faults, faulty wiring, and electrical shorts are common causes of electrical fires that can destroy homes. It’s important for homeowners to have a basic understanding of electrical systems to ensure safety and recognize their limitations.
For systemic issues or significant renovation work, it’s essential to hire trusted, trained, and licensed electricians. Professionals can ensure that installations are done correctly and comply with current codes and safety standards.
Plumbing
Small plumbing issues, such as clogged drains, are common and usually easy to fix with basic plumbing knowledge.
However, older homes may present more significant plumbing problems. Many older homes have galvanized iron water pipes, which can become clogged with mineral deposits over time, leading to reduced water pressure. These pipes cannot be repaired and must be replaced.
Additionally, it’s important to check whether your water may be contaminated with lead, which can be related to either your home’s plumbing or the pipes from the municipal system to your home.
The Bottom Line
When most people think about the costs of homeownership, they think only about the monthly mortgage payments on their residences. Not only must property taxes and insurance be considered, but also maintenance and repair costs.
Unexpected repairs—think replacing or repairing the roof, fixing loose tiles in the shower, removing an overgrown or dead tree, or paying for mold mitigation in a damp basement—typically lead to the highest bills. The list of possibilities is endless, so the best thing homeowners can do is to set aside savings for an emergency.
Mortgage lenders won’t factor this into their equations when determining a loan amount, but you should. It’s a good thing to own your own home—but before you buy, make sure you’re prepared for the actual cost.