When you are in the process of buying a home, you would usually see the difference between your rent and the mortgage. If your monthly mortgage payment is less than the rent it will intuitively sound like you are going to save money. Before you jump to this conclusion, have a look at a few expenses that may increase and few purse strings that you may need to tighten.
You will usually see a few of the costs balloon or or appear as new spending categories:
Home maintenance
Moving to a larger home (single family home or town home) would increase the cost of home maintenance significantly. This may vary from costs like light bulbs and air filters to lawn mowers, pest control, weed control. These charges were non existent during your rental days but will now get added to your monthly expenses. Usually this would be in the range of $200 – $500 per month. Bigger maintenance items may also include repairing a broken HVAC unit or your water heater, replacing the shingles on your roof top. These charges would come unannounced every 2-3 years and would be usually in the range of $3,000 to $5,000. You need to budget for them in your calculations.
Home improvement
With you and your family getting the flexibility to upgrade your home and make it a better place you will look at upgrading your home. This includes home extensions, drapes, painting, furniture and fixtures. This is a discretionary expense, though, and you may chose to defer the spend when you have spare money.
Homeowner Association Fees (HOA)
Most of you that have homes would be part of a Home Owners Association that manages the common area expenses for your subdivision. There is usually a fee that ranges from $200 per year to as high as $3,000 per year (if you are stay in a golf club community). There would be common amnesties that your subdivision would offer (like swim and tennis) for which you need to pay for its maintenance. Few HOA’s that are managed well can help you reduce your home maintenance expenses by including garbage pickup, lawn mowing, weed control in the HOA fees at a negotiated price with these vendors. This will increase your HOA costs but will save you your Home Maintenance costs.
Insurance & Property Taxes
This is one of the biggest expenses that you need to consider when purchasing a new home. The total annual provision that you would need to maintain for these expenses would be in the range of $6,000 to $10,000 per year. Usually these expenses will be part of escrow account that you pay monthly through your traditional mortgage and will not hit you directly. Remember, you are still paying for them.
Utilities
I am assuming you are moving to a bigger home, The cost of utilities like electricity, natural gas, water and sewer, trash pickup would increase. This would be an additional $100 – $250 compared to your rented property.
Expenses that need to be curtailed
Its not as bad as it seems, due to increased expenses, and due to the fact that your money supply is limited, there would be a few discretionary expenses that will reduce in the initial years after you have purchased your home. After you settle down and have a good grasp of your increase in expenses, these would then trend back to regular curve. Few examples of discretionary expenses are listed below:
- Shopping
- Recreation & Fitness
- Entertainment
- Travel
- Donations
Conclusion
Home ownership decisions are made with other considerations – despite increase in expenses (given that you can cope up with the increase), it still makes sense to buy a home versus renting it as you are building equity from your home; rental money goes down the drain from this perspective. As a thumb rule, if you have a visibility and stability of 5 years or more then you would be better off with home ownership rather than rent.