HOME BUYERS FAIR : Mortgage Expenses : The Costs of Buying a Home Add Up : House payments: Taxes and insurance are the two biggest add-ons to the mortgage--but they aren’t the only extra expenses you’ll face.

Figuring out how much you will pay each month for a home starts with the purchase price--but that’s just the beginning.

The monthly mortgage payment--principal, interest, taxes and insurance--is, of course, the largest cost of homeownership for most people.

If you buy at a time when interest rates are relatively low, you will probably opt for a fixed-rate mortgage. In that case, you can calculate at the start exactly how much will go each month for principal and interest for 15, 25 or even 30 years.

When interest rates climb, most borrowers opt for adjustable-rate mortgages. If you know the lifetime cap or ceiling on your interest rate, you can calculate the worst case right at the beginning--the highest monthly payment you could ever have if interest rates shoot through the roof any time during the term of your loan.

Payment of taxes and insurance can be handled in one of two ways. You may meet those bills on your own, or--more likely--they will be handled for you by the lending institution.

Escrow Accounts

When a house is sold for unpaid taxes, a lending institution can be left with no security for its mortgage. The same thing happens when an uninsured house burns down, leaving only the vacant lot as security. So your lender has a direct interest in seeing that you pay your taxes and insurance premiums on time.

With most mortgages, including all VA and FHA loans, an escrow account is set up for you by the lender. Each month, along with your principal and interest payment, you send along one-twelfth of your anticipated property tax and homeowner insurance cost. As the bills fall due, they are sent to your lender, who pays them on your behalf.

You receive regular reports, monthly or at the end of the year, on the status of the escrow account--which is, after all, your own money. At regular intervals, usually yearly, the account will be analyzed, and your payment adjusted, up or down, depending on whether the account shows a surplus or deficit.

This adjustment can be a surprise to the homeowner with a fixed-interest mortgage who expected monthly payments to remain the same for the full term of the loan. What changes is taxes and insurance costs, not--with a fixed-interest loan--the underlying principal and interest portion of the payment.

Insurance

The lender will require that you keep what is known as hazard insurance on the property in an amount sufficient to cover the loan. As a prudent homeowner, you will want wider coverage and for a larger amount.

Rebuilding after a fire, even partially, can sometimes cost more than the original purchase price. And you need personal protection for risks that don’t concern your lender--liability for a guest who is hurt on your property, for example.

Your best bet is a homeowner’s policy, which puts many kinds of insurance together in a package. The least expensive, called basic or HO-1 (HO stands for “homeowner”), covers fire, windstorm, explosion, smoke, glass breakage and other perils including two very important ones: theft and vandalism.

More expensive is the broader HO-2, which adds several more items largely connected with plumbing, heating and electrical systems. Comprehensive insurance (all-risk) covers even more items and is considered a luxury. HO-6 is used for condominiums and cooperatives.

Besides asking what is covered by the policy you buy, it’s important to find out what is not covered; damage from earthquakes, floods and bottles dropped from airplanes, for instance, usually are not. If you have a valuable collection or expensive jewelry, you may need to pay an additional premium for riders covering those items.

An insurance agent may represent one company, or may be an independent broker who places your policy with any one of several companies. Most important, perhaps, is that the agent be able to explain things so that you understand exactly what kind of protection you are buying.

Replacement Value

To illustrate the difference between replacement and depreciated value, let’s suppose that your 10-year-old roof is damaged by fire so badly that it must be completely rebuilt.

You now have a brand-new roof instead of the old one, which was halfway through its useful life.

It could be argued that you were entitled to only half the cost of a roof. On the other hand, you couldn’t buy a half-used roof; you had to spend the money now for a completely new one. Through no fault of your own, you had an expense you hadn’t counted on.

So it’s important to find out whether your policy will pay full replacement value, which should be your goal.

Sometimes it depends on the dollar amount of your coverage; sometimes an inexpensive rider assures replacement value.

One way to economize on insurance is to opt for a larger deductible. This is the portion of your loss you agree to pay yourself. You wouldn’t want the bother of filing claims for $50 losses in any event, and you’re not buying insurance as a moneymaking proposition. Agreeing to handle a larger amount of any loss on your own can cut your premiums considerably.

About Taxes

In California, a property is reassessed by the county when ownership is transferred. The assessment (valuation of the house for tax purposes) changes to reflect the purchase price and the following year’s taxes will be based on that figure.

In other parts of the country, property taxes remain the same when a house changes hands, and the tax bill the seller received last year will be the one the buyer receives next year, except for any communitywide increases.

Make sure you know the true tax figure on any house you are considering buying. The present owner may have some tax abatement; various possibilities, which differ from one state to another, include senior citizens’ discount, veterans’ tax exemption and preferential treatment for religious organizations.

On the other hand, the seller’s tax figure may be higher than the true tax figure. In some localities, for example, unpaid water bills are added to the tax bill. On rare occasions a seller who neglects property could have maintenance such as brush clearing or even repairs done by the local government and the costs added to the tax bill.

Find out whether taxes in your state are paid in advance, for the coming fiscal year, or in arrears, at the end of the tax year. If you are considering a brand-new house, remember that present taxes are probably based on the value of the vacant lot; the exact amount you will pay may or may not be established at the time you buy.

Other Costs

Find out whether trash collection is included in taxes and whether there is any extra charge for other services. Inquire about sewer and water charges. Ask the sellers about their utility and fuel bills for last year, or better yet, for two years back.

Some authorities recommend setting aside 2% or 3% of the purchase price for annual maintenance. It’s impossible, of course, to set any rule, since the age and condition of houses vary so widely.

Include in your calculation of monthly costs the price of basic telephone service and, for most households, cable TV; those figures may vary from one locality to another. Compare costs on homes you may be considering.

Repair, Improve

Improvements are just that--permanent additions that increase the value of your home. Every homeowner should keep a permanent file detailing all expenses for improvements, including bills, checks and receipts. The Internal Revenue Service considers your cost basis for the house to include not only the original purchase price, but also money spent on improvements.

Repairs and redecorating are not considered improvements. Patching the roof is a repair, but installing a complete new one counts as an improvement. Repainting your living room doesn’t count as an improvement, but painting a new wing does. Other projects that are considered to be improvements include fences, driveway paving, new furnace, new wiring, wall-to-wall carpeting, finishing a basement and adding new rooms or bathrooms.

Don’t Over-Improve

Few improvements increase the resale value of your property by the amount you spend on them. Depending on the location of the property and neighborhood price levels and expectations, a swimming pool may add value, or may actually be a detriment when time comes to sell. Make improvements for your own satisfaction, not necessarily as investments.

As a rule of thumb, it is financially unwise to over-improve a house beyond its neighbors.

INTEREST RATE FACTOR CHART

Interest Years Rate 15 30 7.75 9.41 7.16 8.00 9.56 7.34 8.25 9.70 7.51 8.50 9.85 7.69 8.75 9.99 7.87 9.00 10.14 8.05 9.25 10.29 8.23 9.50 10.44 8.41 9.75 10.59 8.49 10.00 10.75 8.78 10.25 10.90 8.96 10.50 11.05 9.15 10.75 11.21 9.33 11.00 11.37 9.52 11.25 11.52 9.71 11.50 11.68 9.90 11.75 11.84 10.09 12.00 12.00 10.29 12.25 12.16 10.48 12.50 12.33 10.67 12.75 12.49 10.87 13.00 12.65 11.06 13.25 12.82 11.26 13.50 12.98 11.45 13.75 13.15 11.65 14.00 13.32 11.85