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How Much Does a House Really Cost?

By []Lawrence D Roberts

When contemplating purchasing a home, one should examine all of the costs of ownership to budget properly for the expenses they will face. Most people simply focus on the payment, and soon after they purchase, they realize that the true cost of ownership is often 20%-30% greater than they expected.

There are 7 costs to owning a house:

1. Mortgage Payment
2. Property Taxes
3. Homeowners Insurance
4. Private Mortgage Insurance
5. Special Taxes and Levies
6. Homeowners Association Dues or Fees
7. Maintenance and Replacement Reserves

The mortgage payment is the first and most obvious payment because it is the largest. Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government's jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. Homeowners insurance is almost always required by a lender to insure the collateral for the loan. If the purchase money mortgage (first lien position) exceeds 80% of the value of the home, the lender will require the borrower to purchase an insurance policy to protect the lender in event of loss. Several areas have special taxing districts that increase the tax burden beyond the normal property tax bill. Many states have provisions which allow supplemental property tax situations. Many modern planned communities have homeowners associations formed to maintain privately owned facilities held for the exclusive use of community residents. These HOAs bill the owners monthly to provide these services. An often overlooked cost of ownership is the cost of routine maintenance and the funding of reserves for major repairs.

Most people only focus on the mortgage payment as their cost of ownership. Those that look beyond the mortgage payment blithely assume that income tax savings through the home mortgage interest deduction will recoup the other costs of ownership or even reduce their monthly costs below the amount of their mortgage payment. These people are mistaken. Even after tax benefits, the cost of ownership exceeds the monthly payment by 20%-30%.

Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?

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