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  Know The True Costs Of Homeowning  

Buying a home you can barely afford can be a big mistake:  nearly 1.3 million Americans had their homes foreclosed in 2006, at an average loss of $75,000.  On the other hand, if you rent long-term you're missing the opportunity to build a nest egg out of "home equity" -- which is defined as the worth of your home minus what you still owe on your home loan.  Here are the major homeowning costs:

  • Mortgage payments include principal and interest.  In the early going, interest is often over 90% of your monthly mortgage payment.  When borrowers make a downpayment of less than 20% of the home's value, they must also pay for private mortgage insurance (you can stop it when your home equity rises above 20%.)  Its yearly cost is usually around 0.5% of the property's value.  Many Americans are unnecessarily paying for PMI (they may not even remember having ever got it!)  Here's two explanatory pages: PMI Tips, How To Remove PMI.

  • Mortgage closing costs, $1000 - $3000.  These include:

    1. Origination fee.  A lender may charge 1% of the loan principal as their fee for loaning you the money.
    2. Credit Report.  Usually $50-$100
    3. Home Value Appraisal.  Usually $200-400
    4. Recording, and Notary Fees.  Usually $50-$100
    5. Lender's Title Insurance (ATA).  Usually $200-$400
    6. Escrow Fee.  Usually $200-$800
    7. Document Preparation Fee.  Usually $50-$100
    8. Tax Service.  Usually $50-$100
    9. Property Inspection Fee(s) (Termite, Roof, etc.).  Usually $150-$250
    10. Homeowners Assoc. Transfer Fees.  Usually $0-$100
    11. Attorney's Fees.  Usually $0-$500
    12. Miscellaneous Fees (courier, underwriting, wire transfer, etc.).  Usually $75-$150

    "No closing cost loans" are often advertised, but this doesn't mean that there are no charges.  It means the company are eating these costs and raising the interest rate they charge to pay for them.

    "Impounds" are charged at closing:  these are simply payments that you make in advance for homeowner's insurance premiums and real estate taxes. These fees are relayed to the local tax authority and your insurer when you get your home.

  • Homeowners insurance, 0.5% or more yearly.  Yearly homeowners insurance costs usually amount to about 0.5% of the value of the property.  But this cost can be much higher in disaster-prone areas.  Unlike auto insurance you are not required by law to get homeowners insurance, but while you have a mortgage your lender will probably require you to carry it.

  • Property taxes, 0.25 to 0.4% yearly.  This can vary greatly from one city to another, even within the same state.  In some places you could pay $8,000 yearly on a $255,000 home, while in other places it's only about $1,000 for the same home.  Here's a list of property taxes by state, but remember that those are average tax rates and some locations within the same state could have double or half the average rate.  To find the real rate you would need to call a knowledgeable person in the area (e.g. a realtor.)

  • Transfer tax, 1% - 5%.  Sometimes called the "excise tax ", this is charged by the city, county, and/or state in most areas.  It's usually between 1% and 2%, but can be as high as 5% in some places.  It's paid by the seller, but again it has to be paid again when the home is sold.

  • A buyer's agent.  They usually don't charge you anything, but they'll receive up to a 3% commision from the seller.  Sellers may be more likely to cut you a good deal if they don't have to pay that fee.

  • A seller's agent, 3% - 7%.  As we mentioned, buyers aren't directly charged a comission.  When you or your heirs sell your home, a real estate agent will charge anywhere from 3% to 7% unless you sell it yourself.  It is still a cost of homeowning.  Sellers must also pay attorney, closing agent and other professional fees costing several hundred dollars.

  • A home inspection, $300.  You should always pay for a home inspection because they almost always find defects that can help you bargain for a lower price.  Usually it costs around $300.  Be aware that a faulty home inspection that does not find bad structural damage can cost you tens of thousands of dollars (some have even lost hundreds of thousands.)  A good way to make sure the home inspector is qualified is to ask for proof that they have liability insurance, and make sure any agreement you sign does not absolve the home inspector of liability for his mistakes.

  • Moving-In Costs.  These expenses can apply to both buyers and renters.  Costs include the moving van, deposits on electric and other services, and perhaps a few purchases of furniture and appliances.

  • Maintenance Costs, 1% - 3% annually.  On average homeowners spend between one and three percent of its value yearly on maintenance and repairs, increasing as the house ages.  Sometimes people think they can skimp on these costs, but it may lead to depreciation of the home's value, and you never know when the government will "assess" your home for repairs.  Assessments can cost anywhere from a few thousand dollars to 20% of the value of your home.  Renters do not have to pay for most repairs and maintenance.

  • Utilities, $50 - $200 per month.  These include electricity, water and heat.

  • Homeowners Association dues.  Many if not most neighborhoods charge dues that can range from $20 a month to hundreds of dollars, depending on how much is provided (for example, trash pickup and lawn care will drive up the cost).  Dues are usually between $100 and $250 in middle-class neighborhoods and condominiums.

  • Capital gains tax.  Most people can avoid this completely because when you sell your residence you can make up to $250,000 in profit if you're a single owner (double that if you're married) and escape paying this tax.  However, you can only get this exemption once every two years.  The regular capital gains tax for most taxpayers is 15 percent.

(Next Gem: How To Estimate Any Home's Value)

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