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.
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.
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
More critical than the possibility of an increase, as I see it, is that very few homeowners actually read their annual policies beyond the declaration page. Most just continue to pay the bill, while others pay for insurance through their mortgage company, and never even open their policy envelopes or statements. Often, insurers do not increase the rate they charge, but instead reduce or limit coverage on hazards previously covered. This, in effect, increases your insurance costs because you would have to buy additional coverage to maintain the same protection you had before.
How does a smart homeowner plan to minimize the impact of homeowner’s insurance premium increases? By setting aside some funds in advance for the increases, which are somewhat inevitable over time. Make a commitment to opening and reading every piece of mail you receive from your insurer. Also, if you are ever unhappy with your rates, shop around for similar coverage — you’d be surprised at how much you can save by switching insurers.
This is one issue you can resolve by doing a mental shift — don’t allow an increase to catch you by surprise. Instead, position it in your head as an expected eventuality — one you know will occur but you just don’t know when. And don’t awfulize this issue in your head. According to the last available data from the National Association of Insurance Commissioners, the average American homeowner’s insurance premium was $729 per year, so a typical 5 percent increase is not likely to throw you in the poorhouse.
Maintenance: By "maintenance," I’m not certain whether you are referring to the costs of repairing and maintaining your home or the monthly maintenance fee owners pay in a cooperative or an HOA (aka HOA dues). So, let’s look at both.
Every home will require repair and maintenance over time. Your best bet to guard against large, surprise repairs is to be diligent about reading disclosures and having inspections during your home purchase, then to obtain a home warranty and (here’s the kicker) keep it in place throughout your ownership of the home. Budget about $300-$400 per year into your total ownership costs for this item, then make sure you renew it when you get the expiration notice in the mail. This will limit your costs for replacing your furnace or water heater if it goes bust. Also, find an online maintenance calendar to help you budget and plan for the larger, routine repairs, like roof replacement and gutter cleaning.
If, on the other hand, your concern is the prospect of increasing co-op or HOA dues, that’s a very valid issue. Here, knowledge is power — before you buy, read the shareholder agreement of your co-op or your HOA’s bylaws to determine whether there are any limitations or guidelines for fee increases. Also, learn what costs the HOA or co-op fees cover and review the financial information on the HOA or coop, provided by the seller — does the group have enough reserves (i.e., savings) to handle the inevitable major common area repairs? Do they have a schedule in place for them? Keep in mind that a community with exceptionally low fees and dues may not be flush with reserves and is more likely to approach members for large assessments when repairs are needed.
Before you buy, read all the community newsletters and member communiqués for the last year — this should help you determine any already-planned increases. After you buy, stay as active as possible in your community by attending board meetings and reading all the materials you receive. This way, you can stay informed and even impact community policy on fee increases in advance.
Like everything else, the costs of homeownership do increase over time. By understanding the way each of these costs increases, being a proactive participant and shopper for the costs you can influence, and planning and saving in advance, you can dramatically diminish the risk of being caught off-guard by a major budget-busting cost increase.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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