Costs of ownership

Home ownership can be an expensive proposition, but if you budget wisely and consider up front the real and potential expenses you will be able to avoid a great deal of grief further down the road.  Many buyers make the mistake of only considering the principal and interest payment when determining what they can afford.  The following are expenses that you are likely to come across when you own your own home.

Principal and Interest

This is the expense most people concentrate on but it is by far not the only expense.  You will have to pay interest on your house purchase until you pay off the house.  In almost all cases your payment will include principal, which is part of the original amount you paid for the house, with the only exception being interest only loans.  See the section on loans for more information about principal and interest.

Property Taxes

With a few rare exceptions, you can count on paying property taxes for your home.  Property taxes vary by geographical area and are used to pay for new roads, schools, and other maintenance work for the town.  There are a number of ways to determine property taxes for a home.

ü  Listings on the Internet will often contain last year’s property taxes

ü  Ask your agent

ü  Full property tax history for King County can be found at http://www.metrokc.gov/gis/mapportal/iMAP_main.htm (or search for “King County iMAP”)

The following directly affect how much in property taxes you will pay.

ü  Condominiums generally have lower property taxes than single family homes

ü  Cities with many businesses (Seattle, Bellevue) generally have lower property taxes

ü  Areas with a high need for new schools and roads generally have higher property taxes than well developed areas.  For instance, property taxes in Woodinville are generally higher than in Bellevue.

ü  Property taxes are not just tied to the borders of a city or town.  School district lines also determine property taxes.  For this reason, houses in the Lakemont area of Bellevue, most of which uses the Issaquah school district, generally have higher property taxes than the parts of Bellevue that use the Bellevue school district.

Your property taxes will usually increase each year with an assessment of your property.  Every few years an actual assessor will evaluate your property, while in other years your property value will be computed based on other properties in the area.  It is possible to challenge this assessment if you believe it is unfair.

Property taxes are usually included in your monthly payment, along with principal, interest, and insurance.

Insurance

In most cases you will be required to insure your property.  There are requirements that you must meet for your insurance and options that you may add such as earthquake insurance.  Before you purchase a house, it is a good idea to consult with an insurance agent to determine your approximate monthly payment.  However, the agent will usually not be able to give you an exact quote without knowing a property’s address.

It is often a good idea to use the same insurance company for your automotive, house, and other policies because you can often get discounts.  Your insurance payment is usually bundled together with principal, interest, and property taxes in your monthly payment.

Condominium/Townhouse Fees and Assessments

If you purchase a townhouse or condo, you will need to factor into your expenses the monthly fee for the building or complex.  This fee pays for uptake of the grounds and maintenance of all common areas of the building.  Therefore, complexes that have pools and gyms often have higher monthly fees than those that do not.

Assessments are one time fees to pay for a particular project or expense.  For instance, a large maintenance project or other large change to the complex will often be covered through an assessment that must be paid by all members.  Assessments are generally higher than the monthly fees and can reach considerable amounts.  It is usually not possible to know in advance when an assessment will be required, but many complexes have rules regarding the amount and regularity at which they occur.  It is always a good idea to review these rules either before making an offer or during neighborhood review.

Single family homes do not have condominium or townhouse fees, but may have fees for the subdivision.

Subdivision Fees

Many new construction homes located within subdivisions of other similar homes require subdivision fees.  These fees pay for any common areas that the homes share.  Typically this may include the subdivision entrance sign and occasionally tennis courts and other facilities.  This fee is usually paid once per year and overall is much less than the average condominium or townhouse fee.

When considering purchase of a newer home located in a subdivision, it is always a good idea to enquire whether subdivision fees are required and how much they are.

Utilities

It is shocking the number of buyers who do not calculate the standard monthly payments into the cost of a house.  This is particularly important if you currently rent, because these costs will rise considerably for home ownership.  Among the expenses you should consider are.

ü  Phone – this should not increase if you already have a phone

ü  Electric – If your home uses electricity for heating, you can expect to pay a lot each month for your electric bill.  You can best budget for this by finding heating costs for similar homes to the one you are looking for or by contacting your power company.  Many houses in King County use Puget Sound Energy for gas and electric.

ü  Gas – If your house is powered by gas you will need to consider this expense.  Gas heating is usually cheaper than electric.

ü  Oil – Some houses are still heated with oil and if so this must be factored into your expenses.

ü  Water – In many cities, water bills are paid to the municipality (for instance Bellevue and Seattle).  To estimate your water bill, your municipality or water provider will be glad to provide an estimate given the size and layout of a house.

ü  Trash – Trash expenses are calculated based on the size trash container you wish to have picked up.  To determine this cost, contact your local company.  Large portions of King County use Allied Waste Services.

ü  Cable – If you use cable, make sure to factor it into your monthly expenses.

Maintenance Costs

Probably the most overlooked expense for new homeowners are maintenance costs.  There is no way to predict what maintenance costs you will encounter, but the following can be used as guides.

ü  Single family homes generally have higher maintenance costs than condominiums.  However, do not think that by buying a condo you will not incur maintenance costs.  Appliances will break and flooring may need to be replaced.

ü  Older homes on average have higher maintenance costs than newer homes.  However, a newer home built by a poor builder may have the highest maintenance costs of all.

ü  You may be able to discover some potential maintenance costs at inspection time.  Your inspector may be able to alert you to structural and exterior issues that may have to be addressed in the future.

Home buyers can somewhat alleviate some maintenance costs during the first year of ownership through a home warranty.  Home warranties will cover any faults in the appliances (generally kitchen appliances, washing and drying machines, furnaces, and hot water heaters) during the term of the policy.  As sellers often leave old appliances in the house and you may use the appliances in ways they were never used before, this is the most likely time for them to break.  On some occasions, a good real estate agent will attempt to negotiate for the sellers to pay for a home warranty for the first year, at no cost to the buyer.  When this does not occur, it is recommended that the buyer consult insurance agencies that specialize in this type of coverage.

Private Mortgage Insurance (PMI)

If you put less than twenty percent of the sales price of the home down, the bank will usually require you to pay Private Mortgage Insurance (PMI), which is calculated based on the amount you owe and the sales price of the home.  It is possible to avoid PMI through creative financing – see the next section for details.