What are the all-in costs of home ownership?

Conventional wisdom may lead you to believe that the only costs of home ownership are the down payment and the monthly mortgage payment. However, if you budget with only these two factors in mind, you'll likely be caught off guard when the bills come rolling in.

Some additional costs to keep in mind:

This is not meant to discourage you from exploring homeownership, but rather to provide a comprehensive view into the costs you can expect when you become a homeowner. See the benefits of home ownership

What if there's a market downturn?

Unfortunately, if the real estate market declines, so will the value of your home. On the other hand, if the real estate market is on the rise, homeowners will benefit from the appreciation of their home value. Just like the financial markets in general, the only sure thing in the real estate market is that it will go up and it will go down.

The impact of volatility in the real estate market is unavoidable, even if you're not a homeowner. If you rent and the real estate market is on the rise, you can surely expect your rent to increase. But rent prices do not always increase one-to-one with home prices. According to Redfin data, between Jan 2010 and Dec 2017, average home prices have increased by around 53%, but average rents have increased by around 26%.

In the event of a downturn, if you have a fixed-rate mortgage your monthly mortgage payments should not be affected by any market volatility. However, you are at risk if there's a significant drop in real estate prices and you have a sudden need to sell your home, say for a job opportunity in a new location. In this case, you may be forced to sell your home at a loss. If the value of your home has decreased significantly, you may not have enough to repay the remaining balance on the mortgage.

It's wise to understand what can potentially go wrong. But in the face of certain uncertainty, our advice is the same advice we give investors: The risk of a downturn is a part of life. Having a long-term time horizon and staying the course is your best path forward. Consider the benefits of owning a home.

What are the benefits to owning a home?

Even if you don't buy a home, you still need to pay something for lodging. For most people, this is in the form of monthly rent. When you buy a home and pay a mortgage, you're actually saving into a permanent asset. Plus, you get the automatic protection against rising rent costs. See how to value a home as an asset

There are a few concrete financial benefits to owning a home, namely a potentially significant tax break. Renters don't get a tax deduction from the rent they pay. But as a homeowner, you can deduct up to $10,000 paid in property taxes and interest paid on mortgages with balances of up to $750,000 from their federal taxes. When it comes time to sell your home, you may even exclude the capital gain, up to a certain limit.

The most significant benefits to owning a home are likely not financial. You want to buy a home because you want a place to call your own, a place that gives you freedom to live the life you want. Your reasons are often justifiably emotional, which is why the case for buying a home can't simply be rationalized by a financial model.

In fact, in a recent National Housing Survey by Fannie Mae, when survey respondents were asked to choose their top reasons for buying a home, the top four were non-financial.

How do I compare buying versus renting?

When it comes to home ownership, it's tempting to compare your monthly rent with your potential monthly mortgage. While this is a logical way to evaluate costs on a monthly basis, it actually ignores a number of significant considerations.

To make an accurate comparison between renting and owning, you should understand the full costs of homeownership. In addition to monthly mortgage payments, there are a number of additional monthly home expenses to consider, such as property taxes, insurance, and HOA fees. These other expenses can add up to 26% of what you spend each month on your home Review the all-in costs of homeownership.

In addition, in order to be approved for a home purchase, you will need to make a down payment. This amount is usually at least 20% of the total home cost. In addition, the amount of down payment you make affects the terms of your mortgage. See what you should know about the down payment.

While buying requires more upfront costs, you also own the house outright, albeit with debt from the mortgage. Over time, the monthly mortgage payments you make will start increasing your home equity. The money you pay on rent, on the other hand, is money you'll never get back. See how to value a home as an asset.

How does a home fit in with my other goals?

The right home is one that still allows you to meet your other financial priorities with confidence. This means understanding how much home you can afford, and also having a clear sense of your other goals — both short and long term.

1. Before you start saving for a home, you should put money towards paying down high interest loan. We define this as loans with interest rates greater than 6%, such as credit card loans or student loans.
2. Next, you should contribute to your company-sponsored 401(k), but only if your employer offers a matching contribution. An employer match is basically free money, making it much more attractive to participate.

After you pay down debt and put money towards your 401(k), it's time to understand what your financial priorities are. Do you want to cover your children's college education costs in full? What about having a comfortable lifestyle in retirement? Do you need to buy a home sooner than later? Once you've decided the relative importance and timing of these priorities, you can then determine how much of your savings to allot to each goal.

The reality is you only have so much money to work with, so prioritizing one goal will have an impact on the others. To demonstrate how to consider trade-offs, let's walk through an example. Let's say you're deciding between buying a larger home that costs $800,000 or a more modest home that costs $500,000

It's important to have a comprehensive plan that accounts for all your financial goals. But arriving at that plan takes careful research, calculations, and projections. That's why we built Path, our comprehensive planning solution that does it for you. Get started with Path.

What's next?

A home purchase is both a major financial and life decision. Once you carefully weigh the costs and benefits of a home purchase, you can start to make decisions on the details — finding the perfect neighborhood, determining what size home you need, and figuring out your timeframe.