Drew Harrell


The total cost of buying a home includes the purchase price, the cost of borrowing money for the purchase, and closing costs. Most people make a cash down payment, or a percentage of the total cost of the house paid at the time of purchase, to their lender. Some lenders require no down payment; others ask for as much as 30%. The more money you can put as a down payment, the less you need to borrow. The balance of the purchase price (after the down payment) is usually borrowed through a mortgage loan taken with a bank or other lender. The money borrowed is called the principal. Interest must be paid on the mortgage loan. A mortgage gives the lender the light to take the property if the loan is not repaid as agreed. The length and terms of mortgages vary; 15-, 20-, and 30-year mortgages are common.


After the home is bought, a homeowner has many ongoing expenses. Cash has to be paid out for property taxes, repairs, maintenance, utilities, insurance, mortgage interest, and special services such as trash pickup. Two other less obvious expenses are depreciation and the loss of income on the money invested in the home. Depreciation is the loss in value of property caused by aging and use. The loss in value may be caused by the wearing out of parts of the home, such as the roof. It may also occur as home styles change or if the home becomes too expensive to heat and cool as energy costs rise. Most housing depreciates slowly at about I % to 4% of its original value per year. The amount of depreciation cannot be calculated until a house is sold. Until that time, depreciation must be estimated. Estimates of depreciation are often shown as a percent of the original purchase price. Loss of income occurs because the money initially invested in buying the property (down payment and closing costs) could have been deposited in a savings account or other investment and earned interest. One financial benefit homeowners have is that they may include the interest they pay on their home mortgage and the property taxes they pay on their property as itemized deductions on their income tax return. This reduces the income tax they pay. Homeowners also build equity in their homes. Equity is the difference between what is owed on a home and its value.