The Costs of Owning a Home
You probably don't want to live in your parents' basement at age 40. You might also not want to live down the hall from the family with the screaming baby and the man who makes boiled cabbage for supper every night. Eventually, there's a chance you'll want to own your own home, complete with picket fence, Japanese reflecting pool in the back, and garden gnome (placed with irony) in the front yard.
That's all well and good, but a lot of people are probably feeding you some serious bologna sandwiches when it comes to owning your own home. For example, you may have been told that your home will become your biggest investment.
Let us tell you: if it is, you could be in big trouble.
Asset or Liability?
The reality is that just like a car, a home can be a liability. Unless you're buying a house as an investment, the home you're living in is probably eating up a lot of money in insurance, taxes, mortgage interest rates, new heaters, and all the money you're going to spend trying to keep the raccoons out of your roof and garbage (seriously, raccoons are ruthless when it comes to moving in and staying in).
What Does it Cost to Own a Home?
First, you have to pony up the down payment for a mortgage. Depending on what house you're getting, this can be anywhere from $10,000 to…we won't even go there. Usually, it's at least 10-20% (and usually more) of the asking price.
Tack on real estate agent fees, taxes, and closing costs if those aren't covered, and don't forget to account for the fact that you're paying money on your mortgage. Your mortgage may seem to have an itty bitty 5% interest rate, but don't let that fool you. On a $300,000 house, that can really add up.
And remember: your rate can increase.
No matter what state you live in, you're going to be paying property taxes to that state for the privilege of living there. And it won't feel like much of a privilege when you get the bill.
Property taxes vary widely state by state. In California, for example, Prop 13 (1978) reformed the tax system, and property taxes were raised to 1.25% of the purchase price as the annual tax—plus an inflation-based increase each year. The idea was that since California business was booming and inflation was on the up and up, there was a relatively low tax rate that would increase with inflation as people's property values (and incomes) rose.
Back then, it allowed people to live in their homes without paying a ton in taxes. Over time, though, that 1.25% rose faster than the stakes in a Vegas Blackjack game. Let's say that MaryJoe and BillyRae bought their Los Altos home for $78,000 in 1980. They would pay 1.25% of $78,000, or $975 a year in taxes.
After 20 years, their taxes would creep up slow like the desert sun to something like $2,000 a year. But then in 2000, Martha and William bought the home from MaryJoe and BillyRae. Housing costs had increased fast in Silicon Valley, but Martha and William thought they got the house at a bargain at "just" $2 million. Their taxes? $25,000. Yep, you read that right. Woot. Well, woot for the state, anyway.
So Martha and William are now stuck with a hefty mortgage and have spent a lot of cash on the down payment. Maybe they need to update the home because MaryJoe and BillyRae had an unusual fondness for cow-themed wall-paper. At the same time they're paying for all that, they're also paying for mortgage insurance, groceries, electric bills, toothbrushes, and everything else. We hope they have amazing jobs.
But, wait! There's more!
That house is now worth $2 million, right? Not exactly.
When MaryJoe and BillyRae lived in the house, property values went up and up. Anyone who's been around since 2008 knows that up is not the only way the barometer goes. Martha and William might just find themselves in a house worth $1.5 million if the neighborhood is suddenly less attractive to buyers—but they'll still be paying $25,000 in taxes (not to mention that mortgage).
Taxes, Home Loans, and Property Values, Oh…No
Taxes aren't the only headache for Martha and William. There's also that pesky mortgage. And while their tax burden will become a huge pain in the you-know-what if their property value decreases, what will really make them scream is the mortgage.
That's where the stuff really hits the fan.
Let's say they put down $400,000 and took out a loan for $1.6 million at 7% interest (they both have very nice jobs and the bank was happy to lend that money to them). But people are moving out of the neighborhood or losing their jobs or just finding cooler places to live, and the house is now worth 30% less at $1.4 million.
They've sunk their life savings and now have a house that's worth less than what they owe. In case you're wondering, that's bad news. In a movie, it's where the hero would stare moodily into the distance while clenching his fists at the unfairness of the universe. Martha and William can't do that, mostly because they're too busy working overtime to pay for everything and worrying themselves sick about their finances when they do make it home.
Martha and William are paying $112,000 in interest on their loan to stay above water. That means that they aren't even paying down the loan itself. If they can't keep up, then they could lose the house (and all the money they put into it so far).
And the house is worth less than what they owe, so they can't sell the place and start over somewhere else. They're probably wishing they had let the cow wallpaper in the kitchen scare them off…
What can they do? Stay? Walk away and pay off the difference? Is it their fault for taking on the loan or the bank's fault for giving them such a big mortgage? Should they switch careers? Is American Horror Story still their favorite show? There are a lot of questions running around in their heads.
The point is that home ownership has ended up costing them a lot more than they thought.
And yes, we're ending on a downer.