Home ownership is great, and depending on how many years you own your home, it can be an excellent investment. However, it is also one of the biggest purchasing decisions you can ever make.
When I bought my first apartment, I saved up everything I earned over the previous three summers to afford the down payment. But several parts of the actual “ownership” process surprised me. Your home ownership experience is going to be unique. However, outlining some of the common pitfalls can help you make better decisions.
1. Unlike with renting, your monthly payment will not go up
When I rented apartments when I was in college, rent went up every year. This was one of the reasons that made purchasing a home an attractive choice. However, I found this to be not true.
Sure! Your monthly mortgage payment is fixed. However, property taxes and insurance go up every year. I pay about 5% more than when I started.
Property taxes were $3,000 when I bought the apartment. Now, it is almost double at $5,000. Costs will creep every few years — especially when the assessed value of your home is higher when the economy is doing well.
2. Expect to spend only 1% of your home’s value on repairs
The first year of owning my apartment, I discovered major problems and paid about $20,000 to repair them. I had to take out a loan to cover the last half of repairs.
Unexpected repairs are the biggest regret homeowners have. They can be expensive and cause significant stress. In reality, you are going to have expensive and inexpensive years.
The solution? Get good insurance to cover any sudden catastrophic costs.
Most homeowners insurance plans — Lemonade, State Farm, All State, and Farmers — covers water damage, roof leaks, freezing, electrical damage, and most other things. I personally use Lemonade.
For appliances, I would personally go for Choice Home Warranty or Select Home Warranty. You are paying a few bucks per month to get coverage in case your refrigerator, washing machine, or oven breaks down.
3. Mortgage Rates are Similar Between Lenders
If you shop around for the best rate, you could save significant money. Some local governments or organizations run programs to help first time home buyers, or decrease your interest rate or down payment.
Banks have mortgage relationship pricing programs that give you a rate discount for having a certain dollar amount of assets.
For instance, having a $50,000 account balance with Citi will qualify you for a 0.125% interest rate saving. On a $30,000 loan, you are saving $375 a year, or just under $10,000 for the life of a 30-year mortgage!
4. Energy Efficiency Improvements are a Waste of Money
In some cases, yes. I would not recommend replacing functional appliances with newer ones that are just slightly more efficient.
However, when I bought a fixer-upper in the suburbs of Chicago, I also upgraded the home with new insulation and boiler. The heating bills dropped by $75 a month. That is over $900 a year. These improvements paid themselves off in two years!
Solar panels are being increasingly attractive and cheaper. They can offset electricity costs, especially if you live down south.
5. It is Easy to Sell Your Home When You Want to Move
This all depends on the city, the price you want, and your timeline. Moving is tough and stressful. It usually takes more than more than 60 days to put your house on the market and get the sale closed.
You are generally paying 4 to 6% of the value of your home when you sell it:
(1) Agent commissions
(2) Attorney fees
(3) Title insurance
(4) Transfer taxes