Homeowner Costs Add Up Fast; Here's How to Pare Them Back

What's a person's biggest economic expense over time?

"Buying, owning, and maintaining a house," says Jordan Clark, president of the United Homeowners Association (UHA), a public-interest group based in Washington. Although homeownership can provide a significant federal tax break through the mortgage-interest deduction, it also results in net outlays of thousands of dollars over each year. Thus, it is imperative to be on top of your investment, slashing expenses and maintaining its value, Mr. Clark says.

Cost savings are particularly important for younger people entering into homeownership, who typically do not have as much discretionary income as older homeowners.

Homeownership has been inching up in recent years, following a decline in the 1980s, when housing prices soared throughout the United States. About 66 million Americans now own their own homes. The Clinton administration recently announced that it is targeting homeownership as a national priority, aiming for 8 million new homeowners by 2000.

There are no set answers regarding how best to reduce housing costs. Savings options will depend on your particular house and where you live. But, if you already own a house and have signed a mortgage, here are five areas where housing experts say large savings are possible:

Mortgage. You might want to check that your bank or lending agency is properly computing your monthly mortgage payment, especially on adjustable-rate mortgages, where terms frequently change, says Grant Mydland, a vice president of the for-profit American Homeowners Association (AHA) in Stamford, Conn.

Many studies have shown that lenders sometimes do get their math wrong. One homeowner audited by the AHA turned out to have been overcharged $25,000 over a 13-year period, Mr. Mydland says.

If a homeowner feels uncomfortable about the mathematical work on his or her mortgage loan, the AHA can audit the loan for a fee of less than $300. Some accounting firms will also audit your mortgage, but usually on a contingency basis, where the firm takes a substantial portion of any overpayment. To reach the AHA, call 888-470-2242.

Property taxes. Make certain you are not being overcharged on local property taxes. You can get a copy of "How to Fight Property Taxes" by sending $2 and a self-addressed stamped envelope to the National Taxpayers Union, 108 N. Alfred St., Alexandria, VA 22314.

Insurance. Most homeowners have to take out insurance as a precondition to the mortgage loan. Shop around, but don't skimp. Experts say insurance should be set at "replacement cost" (not to go below 80 percent of actual current construction costs), or better yet "guaranteed replacement cost," a higher standard.

If you live in a special-risk area, such as where hurricanes, earthquakes, or floods may occur, you should make certain you have insurance to cover that risk. But obtaining special-risk insurance "is not always easy," says Clark of the UHA. In California, for example, 90 percent of all homeowners do not have earthquake insurance, he says, in part because insurers, fearful of losses, are fleeing the state. One solution, he says, is to join a local homeowners association to fight for political objectives such as gaining low-cost risk insurance. There are about 130,000 local homeowners associations around the US. "Every homeowner should join a local group" if one is available, Clark says.

Construction. If you bring in contractors to do repair work or renovation, he adds, "make absolutely certain they are licensed, bonded, and have insurance." Perhaps no single aspect of home ownership is subject to such potential problems, or outright fraud, as contractor work.

"You can't begin to be too careful when dealing with contractors," says Chris Christensen, an official of the American Homeowners Foundation, (AHF), a nonprofit group in Arlington, Va. "Don't even think of entering into an agreement without a written contract."

The AHF offers a model contract for repair or remodeling. The cost: $7.95 plus $2 handling. Write to AHF, 6776 Little Falls Road, Arlington, VA 22213.

Some experts say a contract should always include start-up and completion dates. The contractor should also be required to provide replacement materials and work if the project does not meet specified goals. Payment for work performed should be made in stages. The final check should be made out only after the project is completed.

Sale. Remember, if you sell your house and buy another house of equal or greater value, you can postpone tax on the profit. But you must purchase and move into a new house within two years of the sale date, or no earlier than two years before the sale. (Some exceptions apply if you live overseas or serve in the military.) If you are over 55 years old, you may also be able to use your one-time exclusion from capital gains taxes of $125,000 in profits. Also, make certain that you maintain all documents on major construction or repair work, since such receipts will reduce your capital gains.

The nonprofit UHA offers a newsletter on housing matters (call 800-UHA-8847). Dues are $18 a year.

*First of two columns on homeownership. Next Tuesday: fighting foreclosure.