The thought of buying a piece of property by “paying to own” a house, through a mortgage, might appeal to you more than “paying to use” a rented home. Homeowners have to keep in mind, the various aspects of ownership, before they take the plunge.
Making such an investment entails many costs to complete the whole deal. Some, like down payments, may be obvious. However others, like closing fees, home insurance costs, home inspection, land transfer taxes and moving fees are part of the “hidden” costs involved in the deal. And for some, there may be additional costs associated with purchasing land, like new appliances, refurnishing and landscaping.
As a homeowner, there are many added responsibilities that were absent when you rented. Numerous maintenance issues, whether large – like a busted furnace or leaking roof – or small – like a dripping faucet, that you passed on to your landlord, now become your problem by virtue of you investing in real estate. Older homes might need windows replaced, or insulation changed. Those are significant costs for the homeowner when he has set his eyes on a particular land.
To find out whether you are ready for homeownership, consider the following:
1. Find out the value of the properties that interest you, before jumping the gun. Real estate agents are privy to this information, as the values are determined by other similar properties sold in the immediate vicinities where you plan on making your final decision.
2. Research various home financing options available, and assess what the down payment for the house will be, versus the funds you have available for that property. Down payments could range anywhere between 3% to 20%. Make sure you consider having a Private Mortgage Insurance (PMI) before the concluding verdict. While PMI may help reduce down payments to as low as 3%, the lower the down payment, the higher your monthly PMI costs will be, and could range between $45 and $130.
3. Closing costs can be significant when a property is chosen to be bought. These costs will be provided to you when you apply for your loan, might include: Lenders point charges (due to them for getting you competitive interest rates – a point is a percentage of the loan amount); home inspection; property taxes; financing costs; and loan interest charges. Another cost when investing in real estate is title insurance, which usually amounts to a percentage of the home value, and can protect you from costly errors in title searches.
4. The down payment and closing costs together represent the money you need up front for a property as a homeowner. But there’s more!
5. Homeowners must consider the costs for the actual move into the new home. Generally speaking, the greater the amount of possessions to be moved, professional movers will charge you more money to move you.
6. Property taxes are a component that cannot be ignored, and the homeowner should calculate before the property is bought. Some lenders will require you to deposit costs for taxes and insurance into impound (or escrow) accounts, so they can then pay these amounts on your behalf. It could require you to make provisions of up to 1.5% of your home value for taxes.
7. Initial and ongoing maintenance is another big-ticket item you should be prepared for when investing in real estate. According to reputable home inspection company, HouseMasters, based on over 2,000 home inspections, they estimate you should provision for the following amounts if you need to make these repairs as part of the transaction:
- $1,500 – $5,000 for fixing roofing issues
- $20 – $1,500 for electrical systems repairs
- $300 – $5,000 for repairs to plumbing systems
- $800 – $2,500 for central cooling system repair and maintenance
- $1,500 – $3,000 for repairing your central heating system
- $800 – $1,500 to fix faulty insulation
- $3,000 – $15,000 to fix major structural systems
- $600 – $5,000 to fix water seepage problems
Another cost attached to a dwelling is homeowners insurance. Data from the National Association of Insurance Commissioners indicate that rates can be as much as $822. When making a final decision on a home, a number of factors, including the age and state of the home, your own credit and insurance history, and issues such as toxic substance litigations, can drive this cost up.
When the final tally is complete, you will know where you stand with the funding needed for a abode. If you are still shy of funds, meet with your lender or Realtor to discuss creative options that may be available.
Homeownership as an investment offers great benefits, including the ability to plan monthly mortgage payments, unlike annually increasing rents, and some great tax deductibles – for mortgage interest, property taxes and closing costs. But best of all, when investing in real estate to become a homeowner, you have your very own piece of property than can greatly appreciate with time!