Higher homeownership costs on horizon

Q: The thing that scares me the most about buying a house is all of the unexpected costs that might come up. If I get a 30-year fixed-rate mortgage, the mortgage payment will stay the same, so I don't have to worry about that. But what about taxes, insurance and maintenance? It seems like those things could change a lot over the time I own the home.

A: If there is a silver lining of the current housing crisis, it is that future homebuyers make their real estate and mortgage decisions much more deliberately, and place a greater value on ensuring that their mortgage and other ownership obligations are sustainable in the context of their household financial plans. The lesson is worthless, though, if you allow fear to run rampant and unchecked by reality, paralyzing you from buying while prices and rates are low and depriving your family of the advantages of homeownership.

Mindset Management

Mastering the stresses of buying a home is a three-step process that starts with getting a deep understanding of precisely what your concerns are. The second is to shatter any illogical fears with accurate information. Finally, you must address the logical fears with strategic planning and due diligence.

It sounds like your fears are logical in nature, and all arise from the risk that your costs of ownership will spiral beyond what you can afford in the future. My prescription is due diligence to ground your concerns in the reality of exactly how variable these costs actually are, and planning to minimize the possibility of unexpected surprises.

Need-to-Knows

You are correct that these costs, like the cost of everything, increase over time. The best way to overcome your fear of unexpected increases in your taxes, insurance and maintenance costs is to educate yourself about the reality of how they change over time, and by how much.

Let's take the costs you are concerned about in turn:

Taxes: In most areas, property taxes are determined on an annual basis. Your precise property tax amount is generally based on your county tax assessor's decision as to your home's value each year. In almost every state, your home's value will be reassessed at the time you buy it. Some states will assess your home at the price you pay for it; others will actually make a determination of value based on recent home sales in your area and even a drive-by visit to your home by the assessor's staff.

To get to the heart of your issue, you will need to know how the assessed value of your home will change over time. Some states, like California, limit the amount your property taxes can increase every year to 2 percent. Others actually reassess the value of your home based on recent sales every few years. Also be aware that most areas have special assessments to pay for municipal improvements not covered by property taxes -- these are generally voted on during political elections (just one more reason to vote). Ask your Realtor how these things work in your area, or call your tax assessor's office.

Insurance: Homeowner's insurance premiums are also set on an annual basis, but tend not to increase by massive amounts unless you increase your coverage, you have excessive claims against your policy, or the actuarial likelihood of a covered risk to your property increases significantly. For example, after Hurricane Katrina, some homeowners' insurance rates rose 25 percent! Competition among insurers helps to keep rate increases checked, and increases must be approved by your state's insurance commissioner. ...CONTINUED

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