My wife and I live in southern Florida where, according to one report, 27% of homes have seen a foreclosure notice since 2007. In other places the numbers aren’t as bad, but they’re still depressing. What happened? Sure, times were tough, but even when unemployment topped 10%, that left about 90% of us employed.
Many people blame the banks, and perhaps with good reason. We were encouraged by a banker to lie about our income when we applied for a mortgage loan in 2006 (we declined). Many lenders pushed borrowers into adjustable-rate mortgages (ARMs) that became what Bloomberg calls “nightmare mortgages.” They didn’t make it clear how high those payments could go.
On the other hand, buyers chose to have those loans, and now ARMs are making a comeback. And people often chase the dream of homeownership without pausing to consider the reality of what it requires in terms of money, time and work.
So here’s a question: Are you ready to own a home?
1. Do You Know the Real Cost of Homeownership?
You might think of the cost of owning a home as the classic “PITI,” which stands for principal, interest, taxes and insurance. But that’s only part of the story. You’ll have many other expenses, which, depending on what you buy, and where, might include:
- Homeowner’s association (HOA) dues
- Natural gas or heating oil
- Water and sewage
- Garbage collection
- Special tax assessments
- Improvements and updates
- Maintenance and repairs
- Lawn care
Sure, you’ll pay some of these expenses when you rent, but if you want to fairly compare renting to buying, you should do the math. The home you buy is likely to be larger than your apartment, so things like heating and electricity will cost more. And maybe your rent includes water or garbage collection, which you’ll be paying for directly as a homeowner.
Calculate monthly expenses as closely as you can for a good idea of what you’re getting into. Divide annual bills, like taxes and insurance, by 12 to find the amount to include in your monthly tally.
Other expenses involve trickier calculations. For example, what does an air conditioner cost per month (excluding electricity)? We recently paid $4,200 for a new one, and here in Florida they last about 10 years, which works out to $35 per month for the unit. Every year, it needs at least one check-up ($69) and a few filters ($36). Every few years, it needs $200 or so in repairs. So the total cost is about $50 per month.
Of course, you don’t pay for repairs every month. For that matter, you might not need a new roof for another dozen years. But you will pay these larger expenses eventually, so you should make sure to account for them. I even calculated the cost of painting the house to arrive at our monthly cost of $565 for our current home (with no mortgage).
Using a multiplier is a simpler way to calculate some of these expenses. For their Rent Versus Buy Report, Trulia.com multiplies home value by 1% to calculate projected “annual renovation and maintenance costs” (just divide by 12 to get a monthly figure). I suspect that’s a bit low if you buy an older home. For our 1980 home, my more detailed calculations worked out to more than 3% annually, and that’s with me doing much of the painting and repair work.
I suspect that some people who lost their homes to foreclosure never really knew how much a house was going to cost them.
2. Are You Ready for the Work?
When we left our condo and bought this house last year, I knew we needed things like a rake, a shovel, a ladder and so on. I calculated these expenses — and even the average monthly cost to operate, repair and eventually replace our new lawn mower. But the amount of work caught me by surprise, despite having owned six other homes over the years.
I didn’t realize lawns in Florida need to be mowed every five days during the summer season (when it rains almost daily). And we have a big yard. I’m also surprised our two big trees look so good while dropping 20 branches weekly for me to pick up.
There’s a lot of work to owning a home. If you aren’t going to do it yourself, be sure to account for the cost to have others do it for you. Otherwise, consider whether you’re ready for the time and effort involved in the following possibilities:
- Mowing the lawn
- Shoveling the driveway in winter (in the north)
- Trimming the bushes and trees
- Watering the flowers and grass
- Applying fertilizer, insecticide and weed killer
- Trimming the grass from driveway and sidewalk edges
- Other basic landscaping tasks (planting flowers and bushes)
- Washing windows
- Cleaning yard furniture
- Cleaning and staining decks
- Cleaning outside walls (they grow green stuff here in Florida)
- Dealing with bills related to owning a home
- Any routine home maintenance you don’t hire out (repairs, painting)
3. Are You Ready for the Surprises?
A year after we bought our condo (our first home in Florida), the air conditioner died. I wrote a check for $4,200 for a new one. Six weeks after moving into our current home, the air conditioner needed a $1,100 repair.
Hey, it could be worse. A friend discovered he needed foundation repairs totaling $25,000 just months after buying his home. That might make an unprepared owner want to give the house back to the bank.
Are you ready for those surprises? They come with owning a home. If you’re not good at budgeting and saving money, you may not be ready for a house. Or, if you plan to put all surprises on a credit card, at least account for the interest charges you’ll have in addition to the cost of that new water heater or garage door.
In addition to the financial surprises, there is also a little bit of stress that comes with owning a home. For example, the air conditioner in our current home died the day my wife’s grandmother arrived from overseas for a two-week vacation. She spent two days in a humid, 95-degree house, listening to my arguments with a home-warranty company about which repairs are covered. Not an ideal situation.
Making the Decision
There are real advantages to renting. You might be closer to jobs, you have the freedom to pick up and go, and renting is sometimes cheaper. And owning comes with heavier responsibilities. There’s no landlord to handle problems that come up.
Still, my wife and I prefer to own our home. We like our big branch-shedding trees, and we like being able to do what we want inside and out. For us, it’s cheaper than renting. And when that squeaky fridge dies sometime in the next year? No big deal — we always keep money in the bank for surprises.
Many real estate experts are saying it’s a good time to buy a home. They might be right, if you fully understand — and are ready for — the regular expenses, the big-money surprises and the work of owning a home.
Your Turn: Do you think you’re ready to own a home?
Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. He’s been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror, and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).