My girlfriend Tag and I have been watching a lot of HGTV and get really excited about the idea of owning a house. Watching people do renovations and get their dream homes is lots of fun and there are times I’m certain I want a house.
But then I think about how much it really costs to own a house and it scares the bejeezes out of me.
Here are 3 reasons why buying a home is more expensive than you might think.
It Costs 6% to Sell Your House With a Realtor
It’s easy to believe that you’re going to get 100% of the value of your home when you decide you want to sell it. In reality, most home sellers and buyers use realtors, and they get a 6% cut (each realtor gets 3% of the purchase price).
photo credit: Images of Money
You can try to sell you house on your own but it’s a very complicated process and it will cost you money and people using a realtor to buy their house won’t even look at yours (the realtor isn’t going to look if he or she won’t get commission on the sale).
If you’re going to sell you home the traditional way (with realtors) that’s a huge chunk of money. If you sell for $200,000, you have to give them $12k and you end up with just $188,000. That sucks.
Closing Costs are Expensive
Selling a home is expensive, but so is buying one. Let’s say you find a $200,000 house you like. Well, you won’t be paying $200,000 for it; you’ll have to pay closing costs as well, which are usually around 2-3% of the value of the home.
Let’s pretend it’s just 2% of the home value. That’s $4,000. Your $200,000 home is actually going to cost you $204,000.
So a $200,000 house actually costs $204,000 and you can only sell it for $188,000. That means when you buy the house you immediately lose $16,000. Wow!
Pro-tip I learned from watching TV: Ask the seller to cover some portion of the closing costs. If they are motivated enough to sell they might just do it. At least that’s what the TV says.
Property Tax, Homeowners Insurance, and PMI
If you’ve never owned a house then you might think that your mortgage is all you have to pay on your house. That’s not true at all.
- Property tax can be very expensive (especially in Texas). A house in the Dallas area that is worth around $200,000 will have about $6,000 a year of property taxes. That’s $500 a month on top of your mortgage.
- If you have a mortgage, they will require you to have homeowners insurance. In Texas, that’s about another $100 or so every month.
- If you don’t have 20% to put down on a house then you’ll have to pay private mortgage insurance, or PMI. The amount of PMI you’ll pay can vary, but it’s usually around $100 for a $200,000 house. Here’s a calculator if you want the exact amount.
- Don’t forget HOA fees. You might live in some fancy-schmancy neighborhood that wants you to pay homeowners association fees to pay for the neighborhood pool, landscaping, etc. This could be anywhere from $0 (no HOA) to a few hundred a month.
Let’s ignore the mortgage for a minute. A $200,000 house in the Dallas metropolitan area is going to cost you about $600-$700 dollars a month even before the mortgage payment comes into play.
Considering the payment on a 30 year mortgage for a $190,000 loan at 3.5% is just $853.18, all those extras come to as much as 45% of your monthly payment.
Pro-tip I learned from an online expert: Invest in a city where the housing market is resilient. For example, a housing market like Baltimore, MD is still lagging behind the U.S. on average. Whereas, in a housing market like Denver, CO, an investment in residential property would be more favorable.
I Want a House… But I Don’t
I really really really want a house. I watch all those stupid shows on TV and think “I WANT THAT!!!!!!” The problem is I don’t have a 20% down payment and even if I did I don’t know if it would make financial sense right now.
Readers: Do you have a house? If so, is it worth it? If not, do you want one?
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The Pro-tip of asking for the seller to cover closing costs really goes against reason #1, the 6% commission. If you ask for $4,000 in closing costs that means the buyer will receive $4,240 less after taking into account the 6% commission.
If you have the cash available, the better option is to ask for a purchase price reduction. Not only does this save $240 in commissions, it could also lower the value of the home for property tax purposes, saving another $120 per year.
That is a pro tip. Great idea! I’ll have to keep it in mind!
I ‘write down’ 7% of the estimated value of my home when I calculate our net worth to cover the realtor and other closing costs that we would expect to incur. We have no intention of selling, but since my goal of our net worth statement is to anticipate the cash we would have if we liquidated all assets and paid all debts, this makes sense to me.
That’s a great way to do it. I would probably do the same except I don’t have a house.
I calculated it and once our house is paid for we will still be paying $500/month in insurance and taxes. There is a push in Texas and other states to get rid of property taxes, because you never really own your property if the government can take it away. Anyway, it is kind of depressing to know that even after I pay off my house I will still owe $500/month…and that is just on property taxes and insurance. What about electricity, gas, water, lawn care, maintenance, etc? Almost seems better to rent.
I think the key is to find property in a state with really low property taxes if you want to live as close to free as possible once the mortgage is gone. Dallas is definitely not that place.
Go to a state that has low property tax and enjoy paying state income taxes! They are gonna get you one way or the other.
Hindsight being 20/20, I would have not bought my house. Of course, I bought it in the peak of real estate in 2006 and the value has gone down since then. At this point, I would rather rent an apartment closer to downtown Denver, but I’m not willing to pay to get out of my house or run the risk of a renter doing damage to it. When I do sell it (hopefully sometime in the next two years), I’m going back to the free and easy life of a renter – I’ll probably be paying less per month and won’t have to worry about maintenance.
I don’t ever plan on selling real estate. Once I buy a house, i want to keep it and rent it out when I’m ready to buy a new one. I’d rather have continuous cash flow than a lump sum. But that’s just me.
Renting is very nice and worry free. It’d be a shame to give that up.
I’m in the military and have been doing that with the houses I buy at each assignment. So far I own 2 houses, and it’s been working out well since I first became a landlord 3 years ago. As long as you screen the tenants well, owning rental property can be a great investment. I use a property manager which has made the process simple for me. I still make a profit afterwards, but if I was local I would just manage it myself and keep the management fee.
Dallas metro taxes are insane!! My wife and I are looking at building in Louisiana near a parish line (parish=county FYI) the taxes on a $200k house on one side of the line is $500/year give or take, on the other side; $1,250….guess which side she wants to live in… Now of course I do to when you take into account we have a child in school and sending her to the public school on the $500 side of the line would equate to about an extra 20-25 minutes each morning just in driving because we both work on the $1,250 side, not to mention the schools are leaps and bounds better. Housing prices being roughly the same, it’s worth the added convenience.
I’ll have to use the advice as “GUEST” about just paying the closing costs up front as opposed to negotiating it into the price. At 6% closing costs, if say, $5000 was taken off the price of the house then the seller would be up $300 ($5,000 x .06) by taking the $5k off the price and not adding it to the closing costs
So I decided to look in some different cities, and I guess I picked the most expensive one as an example. In the 3-4 cities I would consider buying a home, annual property taxes on a $200,000 house are anywhere from $3,500 to $6,000.
Now that I’ve learned that, I would definitely lean towards the city where I save $2,500 a year in taxes.
I guess it really depends on the difference between what you want and what you can settle for. $2,500 saved on taxes is a lot of money, but at times it could be worth it depending on the amenities that the particular city offers….and when you have kids, all that changes.
It depends when you bought! I managed to buy at low points so it makes sense to me. It is better than renting because we stay for years.
Staying for years is really the key. If you can stay for a long time then you can actually build a good amount of equity in the home and buying almost always makes sense.
Kevin,
I like your blog usually, because it does warn against nonsense stuff as average caucasian or AA usually do (having a big student loan, no cash, poor 401, loan debt, an unpaid plasma TV, and 3 cars, including a hummer). But today you kind of surprised me on two fronts.
1) death and tax. If you live in a state with police school and road, the money for that has to come something … tax!!! you will either have property tax or state tax, if not both (see Hawai’i). I understand Texas being nice to the poor as it taxes only the real estate properties (and you thought it was a republican state! Come on that’s almost communism!)
2) 200.000$ for a house, you have a 30 feet tower with it for that? is there also 9 rooms? Can you remind me how many room you need? Or the real estate so seriously crazy in Dallas compared to Houston?
Looking forward for your next post,
Nick
My parents recently sold their house in Houston. My mom felt so relieved to not have to pay for the utilities of a huge house and the property taxes. We were shocked that their monthly taxes were as much as our rent in our downtown East Coast City! And they had a super long commute. From my perspective this seems cra-cra. Why?!?! Perhaps it’s easier to see the insanity from the outside than if you actually own the house.
I’ve also been reading Budgets Are Sexy and all the home repairs they’ve had to the last few month. ugh, I’m so happy to be a renter. Repairs are done in 24 hours and they are free.
Taxes, repairs, possible pmi, closing cost, realtor fees, mortgage interest… at this point in my life houses seem like illiquid money pits. I’d only consider buying if I lived close to work, had a house that was AWESOME for our family, I was 90% certain I’d be in the area over 7 years, a 20 -50% downpayment, and a big ol house repair fund.
We own for the simple reason that we like to customize the place to our taste. It probably costs more to own than to rent, but there is one scenario when that will not be true: inflation. If inflation strikes, owning a home with a fixed mortgage is one of the best investments around.
We have the best of both worlds, I think. We rent a single family home. We don’t do yardwork or other maintenance and we don’t worry much about inflation (rent hasn’t gone up in the last two years, and we’ll negotiate or threaten to look elsewhere if we catch wind of that being a possibility). But, I would like to “customize” more than I can in a rental, and we would like a place of our own at some point. I’d say it’s probably in the 5 year plan.
I want a house really really really badly too, but I too will have to wait a while before I can buy one. Since my fiance and I may be relocating to a different state when we eventually buy a house, property taxes are certainly something we’ll consider.
Yeah, the tax here is a little up there, but I still prefer that over a state income tax.
I have been looking at houses on the north side of town. I have been trying to shoot for homes in Collin County as opposed to Dallas County partially since it is a 0.5% lower PT rate.
Whenever this topic arises, I try to steer first-time buyers in the direction of co-ops or condos. I have a co-op unit on Long Island, in a mixed rental-ownership development, and for a lower purchase price than the average detached home, I have all the tax benefits of home ownership. I have to take care of all interior maintenance myself (such as my appliances, and the HVAC unit I recently replaced); but any exterior maintenance for the complex (including landscaping, snow removal, parking lot repaving, and major capital improvements to the buildings like roof repair) comes out of my monthly maintenance fee (which includes my share of property taxes and the underlying mortgage on the entire complex). I pay a lower monthly amount than renters do for a comparable unit, and I still get a tax deduction after 23 years of living there.
My dad JUST bought a house yesterday. My buddy from college is a realtor, and he was working with my dad. They looked at a “For Sale By Owner” property and when my friend wrote up the contract he put in an amendment for the sellers to pay 3% for his commission. My dad is a vet so he has the privilege of getting a VA loan so he didn’t need a down payment or anything.
One thing my realtor friend says is to avoid propertys that say “we cover closing” because they usually jack up the price 5k-6k even if the closing costs are 3k. So I’ve been lectured to just pay closing costs myself so I don’t get screwed on the price.
Also, I HATE PMI. I was looking to buy a house using FHA, but I could never justify paying $100-$200 in PMI when I could be applying that to my mortgage. I’m currently saving up for a down payment. Here in eastern NM taxes are usually only ~$100 for a $200k house.
I am fortunate enough to live in an area where the payment is less than rent. My payment is $477 with taxes/insurance a month on a 30 year mortgage. I am paying it as a 15 year though ($700/mo). My property taxes are under $1,000 a year. I live in a 3 bedroom house with 1200 sf. I love to customize my house and I own pets. I could never imagine going back to renting again. I have an FHA loan so I have to pay $35 a month in insurance. My property insurance is $475 a year. It was a no brainer for me. I had roommates when I first moved in which drastically reduced my costs. I spend too much on decorating, remodeling and maintenance but most of that is within my control. My house isn’t even recognizable compared to when I first moved in. Unlike the people on Property Brothers I had to stagger it out over 5 years though.
+1 on property bros. That is my favorite show:). I would love $477/mo but that would mean I would be in the ghetto around here. We live in a bubble here where everything is super-inflated. I guess our small town likes to take advantage of the military base located a few miles away.
6% commission! That is a big number. Is there any way that can be negotiated down?
I own a townhome (that I rent out) and recently purchased a single family home. Where I live my mortgage is about $500 less than renting a place.
Here on Long Island, New York a four bedroom home in a town with a good school district will run you $10,000+/year.
If your home is paid off, you’re still left paying almost $1,000/month in property taxes. I’m sure many other states in the Northeast are similiar, and that’s why retirees flock out of here, as well as we’re starting to seen younger generation leave here as well.
It’s the counties on Long Island, who pay cops $150,000/year and teachers $120,0000/year.
Sorry for the rant, as I’m just caught up on the topic of taxes you brought up as cost of home ownership.
Throw on a mortgage payment on a $325,000 fixer upper home here and the cost of homeownership is staggering.
The American dream is home ownership, but here is more of a nightmare.
—end of rant here—
Oh Man I thought texas was tax friendly – 2-3%, that’s insane. My property taxes for the YEAR are 800 bucks.
Great points on trying to sell the house yourself – I’d probably never do it, but some people around here still do, I think they are insane. It’s sad to watch their spirit break, but after a while most people get a realtor or some other agent.
Closing costs are also expensive but you can usually get the seller to pay those (or a portion of them)
Marylin also had a great point – you need to think about repairs. Even if you have a “turnkey” place, you’ll still need paint and stuff like that, and if you get a fixer, you’ll have all the changes you want to make, plus money to fix all the stuff that breaks that you have to have (water heater, furnace, etc)
I’m surprised nobody has said negotiate DOWN the realtor’s commission. When you’re buying it doesn’t matter, because the seller pays. But when you’re selling, negotiate the realtor down to 4 or 5%, which can be done pretty easily in this competitive market. If you have a really expensive home, you can probably get 2-3%.
We bought our house last year, and I would NEVER willingly go back to renting! We were fortunate to find a 12 year old home in a very desirable area for 1/2 of it’s worth. The owner really needed to get out from under it. We had a large down payment and at $500 a month it will be paid off 4 years from now and our taxes are around $1000 a year. It’s in a rural area and the majority of homes on our road are vacation homes, so there are only 3 full time residents including us. It’s very quiet most of the time.
The only down sides of our home are my husbands commute, 70 miles round trip, which we solved by buying a small, 40 mile a gallon car, and although the home is only 12 years old, the septic tank is more like 20 and wasn’t cared for well, so that cost us about $5000 shortly after moving in.
Other than that, we love it! (And it will be an easy sell if we ever want to sell with a practically guaranteed profit!)
If you are passing on bad credit cards then it will, no doubt be tough to get a loan. As explained above, the better those borrower’s credit credit scoring the cheaper any loan will turn out to be that their mortgage lends to these kind of people and vice versa.
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