The True Costs Of Home Ownership

For most people, buying a home is the largest purchase they will make in their lives.

People used to believe that buying a home always was better than renting, since people assumed home values always would go up. Unfortunately, during the recent financial crisis, many people found themselves underwater, owing more on their house than it was worth.

Now it makes sense to do the math before making a decision. One of the best ways to figure this out is to check the price-to-rent ratio. This is taking the sale price of a home divided by the annual rent. If you can buy a home 20 times the annual rent, it may be better to buy. If the number is above 20, it may be better to rent.

For example, the median price of a home of a single-family home on Oahu is $705,000 and the average rental is $3,214. The price-to-rent ratio in Hawaii is 18.28, which means it may be a good idea to buy. Of course, this depends on the neighborhood, how long you plan to stay in the home and quite a few other factors, which brings me to my next point.

If you are going to buy, how much house is too much house? A safe rule of thumb is to aim for all of your housing-related expenses to be no more than 25 percent of your gross income. However, many people only look at only the mortgage of the home when calculating their housing expenses.

Here are seven additional costs in addition to the mortgage you should consider before buying a home, assuming the current median single-family home price.

1) Private Mortgage Insurance (PMI). If you don’t put 20 percent down, you usually have to take out a PMI policy to protect the lender. This typically costs 0.5 percent to 1 percent of the entire loan value on an annual basis. If you put 10 percent down, the annual PMI is around $4,800.

2) Property Tax. The property tax on Oahu is $3.50 for every $1,000. The median property tax for a single-family home is $2,467.50 per year.

3) Homeowners Insurance. The average in Hawaii is $934 per year.

4) Utilities. The average home on Oahu uses 600 kilowatts-per-hour, which is approximately $2,700 per year. Sewer and water fees are $450 per year. Cable, Internet and phone cost about $2,000 per year.

5) Upkeep. When you own a home, you can’t call a landlord if it needs repairs. Hopefully, you had a qualified home inspector walk you through the condition of the home. For example, termite extermination can set you back about $3,000. There may be plumbing, electrical, roofing, painting, landscaping and other types of ongoing maintenance.

6) Appliances, Furniture and Supplies. According to the Bureau of Labor, the average cost for furnishings is $2,224 per year.

7) Maintenance Fees. Some home and condo associations have monthly maintenance costs of well over $1,000 per month! This will depend on your area, but it’s a cost to take into account.

In this example, the additional expenses are $18,575.50 (not counting any maintenance fees) per year! If we add this to a 30-year mortgage at 4 percent ($3,029 monthly mortgage) the total housing-related costs per year is $54,925.90. If we want to stay at 25 percent of gross income, then per year you will need to make close to $220,000! This assumes you have good credit, too. Visit artofthinkingsmart.com/house-calculator to see how much house you can afford. Figure out your number before you start house hunting.

david@artofthinkingsmart.com