Many people consider homeownership as a single cost, i.e., Laypeople often view the purchase price of a property as a single expense. If we are to analyze the situation correctly, then home ownership is a combination of many costs. Budgeting can be a difficult task. This article has prepared a list of costs usually incurred in these scenarios. Some of the investment options include:
Purchase Price
Real estate investment comes with the highest cost. If we invest $100000 in a home, then this is all we’ve invested. We give this figure when people ask, “How much did it cost?” As we will see in this article, the common belief that $100000 is the total cost of a property often needs to be corrected.
The first thing to consider is the transaction costs associated with the purchase. Transaction costs include:
- Brokerage fees.
- The processing fees to the bank for the mortgage loan.
- The legal charges collected by the government to register the property under the new owner’s name.
These costs often need to be considered by first-time buyers. They can easily reach anywhere between 3% to 5% of the property’s value. Even if the price on the listing is $100000, you will pay at least $105000.
Interest Paid
The majority of properties purchased today are bought with borrowed money. The mortgage is now the norm! Today, it is almost unheard of to buy a property with cash. Mortgage payments are made whenever there is a loan. These payments include interest.
In the amortization schedule for any mortgage, the banks will collect the outstanding principal first and then collect all of the interest. If your monthly payment were $1000, then $900 would go to draw in the first couple of months! During the first five years of a mortgage, the borrower is only responsible for the interest payments! During this time, the principal of a mortgage loan is very little reduced. If these expenses are capitalized, the value of $100000 goes far beyond $100000. If the $100000 is added to the deal, the $100000 becomes much more valuable.
Theoretical Interest
In real estate investment, notional interest is paid in addition to the actual claim, which the buyer pays out of pocket. In most real estate investments, the buyer is required to deposit the property. The down payment usually amounts to 10% and 15% of the property’s value. For a $100000 property, the upfront price is $15000. This payment has an opportunity cost. If the money weren’t used for a down payment, it would have earned interest in a savings account or other investment. Once it’s used for the down payment, it doesn’t make any interest.
The amount of lost notional interest should be added to the property’s value, i.e., The $100000 the buyer thought was his initial investment in the property.
Insurance
Mortgage lenders often require that the buyer insure the property. Your property may be destroyed in natural catastrophes such as earthquakes or hurricanes. The borrower may then stop paying for the property. To protect their interest, lenders require insurance.
Many homeowners choose to insure their home contents; the standard insurance covers the value. They do so because they invest a lot of money in interior design and want to protect their investment in case of an unexpected event. This also increases the cost of owning a property.
Property Taxes
When we purchase real estate, we agree to pay a constant stream of taxes to the government until eternity! Property taxes are what these payments are known as. Almost every country in the world imposes them. These taxes are a significant factor in the cost of owning a home. It is important to note that the value of these costs can change over time. These costs often rise at the same pace as inflation. When budgeting to buy a property, one must consider the charges.
Maintenance
Many properties come with amenities. Many gated communities have swimming pools and jogging trails. The goal is to offer a lifestyle, not just a house. These amenities do require maintenance. Keeping the gated community clean and secure takes a large number of staff and equipment. These charges are billed monthly to homebuyers. This also increases the cost of investing in a home. These costs may sneak up on a buyer who needs to pay attention.
Utilities and Furniture
The cost of transferring utilities to your name and furnishing a house is small. The cost of owning a home includes these costs.
The cost of home ownership can be a maze. It is essential to budget for hidden fees. If you don’t, they can significantly impact your budget.