Buying a house comes with a lot of new responsibilities and expenses. Some of these can be surprising to new homeowners. Knowing what to expect makes it easier to plan financially and to prepare psychologically. Our experienced agents have summed up the main outlays to be aware of, including the hidden costs of owning a home.
Key Takeaways
- Your mortgage payment may be higher than your rent, but unlike rent, it can help build equity in an asset you own.
- New costs that house buyers can expect include homeowners’ insurance, property taxes, PMI, maintenance, HOA fees, and additional utility bills.
- Renters pay many of the costs of owning property indirectly through rent payments without getting the benefits of actually owning a house.
- Use a rent vs. mortgage calculator to compare options, but make sure it includes all ownership costs, not just the mortgage payment. Make a decision based on totals.
- Waiting to buy also has costs, including security deposits, pet fees, and losing out on equity building.
Mortgage Payments vs Paying Rent
The most obvious change when going from renting to owning is your core monthly housing expense. When you rent, you pay a set amount to your landlord each month. It’s a simple and straightforward arrangement.
Mortgages are also straightforward on their face but comprise several components: a payment against your loan, interest on the outstanding balance, and often additional costs such as property taxes and mortgage insurance. Many homeowners choose to roll these additional costs of owning a home into their mortgage so that they don’t have to worry about them at the end of the year. The lender holds the funds in escrow and pays them out on your behalf.
You can expect your mortgage payments to be higher than your rent, although that’s not always the case. It’s important to remember that, unlike rent, mortgage payments build equity in a valuable asset.
Costs That Are New to Buyers
There are many monthly costs of home ownership that you don’t pay when you rent. To be clear, you do pay many of them indirectly as part of your rent payments, but when you see them in black and white on a bill that arrives at your home, it changes your perspective.
Property Taxes
Property taxes are an important cost of owning a house because they pay for municipal services like police and fire protection, parks and recreation, local infrastructure, and public schools. These taxes vary widely by municipality, from 3.21% of the property’s value in Detroit to 0.29% in Honolulu.1 Property taxes are typically included in a property’s listing, but keep in mind that the listing may not be accurate and that rates can change.
Homeowners Insurance
If you had renters insurance, you know that it’s relatively inexpensive, typically under $20/month.2 Homeowners insurance is significantly more expensive, running between $1,872 and $4,802 annually.3 In states like Florida, where properties are subject to weather- and climate-related risks, insurance can be considerably higher, and in some areas it’s not available at all.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is required if your down payment is less than 20%. It protects the lender if you default on your payments. PMI is typically 0.5% to 1.5% of the loan amount annually, but this cost of owning a home disappears once you’ve built over 20% equity in your home.4
Maintenance and Repairs
Maintenance and repairs are one of the highest costs of owning a home. A good rule of thumb is to budget 1% to 2% of your home’s value annually for this. There will be some months when you don’t need to spend any of that budget, but putting some money aside for it every month is a good idea because major problems like a leaky roof or a broken furnace can’t wait.
HOA Fees
If you’re buying a condo, townhouse, or a home in a planned community, you’ll likely have Home Owners Association (HOA) fees. These fees cover shared amenities and maintenance of common areas. They range from under $50 a month to over $500, depending on the property and amenities.5
Utilities
You may have paid some of your utilities when you were renting, but as a homeowner, you’ll pay for all of them. Common utility costs of owning a home are:
- Electricity
- Natural gas or home heating oil, depending on how your home is heated.
- Water and sewer
- Trash and recycling collection
- Internet service
You may also need lawn care and snow removal service, especially if you’re on a large property or have a long driveway. Pest control is also your responsibility, and if you live in a rural area, you’ll need to pay for septic system and well maintenance.
Costs of Not Buying a Home
If you’ve reached this point and thought “the hidden costs of owning a home are too high,” it also costs to continue to rent, and eventually it can make more sense financially to buy. Here’s why:
Costs Are Increasing Across the Board
While the costs of owning a home keep rising,6 rents do as well. Keep in mind that while landlords pay property taxes, some utilities, and maintenance and repair expenses up front, you’re still paying for them indirectly. Landlords don’t absorb increasing costs: they download them onto their tenants.
Lost Opportunity to Build Equity
Mortgage payments go toward paying down your loan. As soon as you make that payment, part of that home belongs to you, free and clear. When you rent, you’re only helping your landlord build equity.
Security Deposits and Move-in Costs
Although you get your first and last/security deposit back most of the time, it’s sitting in someone else’s bank account, earning interest for them. When you buy, your money is working for you instead of someone else.
Rent Increases
Landlords can increase your rent at lease renewal. They can also add on items like parking fees or reduce the utilities that are included in your rent, so that you wind up paying them yourself. As a renter, you don’t have a lot of control over these increases.
Total Costs of Owning a Home
A recent study revealed that the hidden costs of home ownership in America are almost $16,000 a year, or about $1,300 per month. This is in addition to mortgage payments. Coastal markets tend to be the most expensive, with homeowners in New York City paying an average of $24,381 per year, and those in San Francisco paying about $22,781. Insurance and property taxes seemed to be driving recent increases.
Hard numbers can be intimidating, but once you know the real figures, you can prepare. The key is to go into the market with an accurate picture. Use a rent vs. mortgage calculator to run the real numbers: mortgage principal and interest, taxes, insurance, estimated maintenance, PMI if applicable, and any HOA fees. The good news is that many markets are moving into balanced territory, where sellers no longer have an advantage, and buyers have more flexibility to negotiate. Your mortgage is your biggest monthly expense, so focus your efforts on negotiating a good price, saving for a solid down payment, and getting a low interest rate.
Frequently Asked Questions
What are the hidden costs of owning a home?
Beyond their mortgage payment, homeowners pay property taxes, homeowners’ insurance, maintenance and repairs, and potentially PMI and HOA fees. A recent study found that these additional costs average nearly $16,000 per year nationally.
Can I include property tax installments in my mortgage payment?
Yes, you can roll your property taxes into your monthly mortgage payments. Most lenders offer or require an escrow account, which collects a portion of your annual property tax and insurance bill each month and pays those expenses on your behalf when they come due. It simplifies budgeting but means your total monthly payment can change if taxes or insurance premiums rise.
What is PMI, and when can I stop paying it?
Private mortgage insurance (PMI) is required when your down payment is less than 20%. PMI typically costs 0.5% to 1.5% of the loan amount annually and is automatically cancelled once your equity reaches 20%.
Is it cheaper to rent or buy?
On a month-to-month basis, renting is usually less expensive. But renting comes with its own long-term costs: rising rent, no equity, and no control over lease terms at renewal.
How much should I budget for home maintenance?
A commonly used guideline is 1–2% of your home’s value per year. On a $400,000 home, that’s $4,000 to $8,000 annually. Setting aside a portion of that each month is a good practice, so you’re not caught off guard when a major repair comes up unexpectedly.
