The True Cost of Owning a Home—10 Things to Consider Before You Buy
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Is it a white picket fence in the suburbs, a secluded ranch in the countryside, or maybe owning an apartment in a high-rise in the middle of a bustling city?
Owning your own home is a dream of just about everyone.
Whatever your dream of homeownership, don’t let it turn into a nightmare by being unprepared for the true financial responsibility of owning a home.
Take some time to plan your financial situation and be fully aware of what all is involved and owning a home will be a more pleasant, less stressful experience.
What Can You Really Afford?
Don’t overextend what you can afford for a house payment. Keep your monthly mortgage payment to 25% of your take home pay (or less if you can). Be sure to take into consideration the costs listed below.
There are cities where the cost of living is prohibitively high for many people. If you are planning to buy a home where prices are extremely high, be sure to shop around for an extended period of time to find the best home for the best price. Make sure you are fully prepared to make the investment by saving a substantial down payment.
1) Down Payment
Your down payment should be as much as possible. Ideally you’ll have at least 20% so that you can avoid paying extra mortgage insurance that adds to the monthly costs.
The larger your down payment, the less you will have to finance and the lower you can keep your payment. Don’t feel rushed into buying a home, be patient and persistent in saving up your down payment.
PITI stands for Principal, Interest, Taxes and Insurance.
When new home buyers think of a mortgage, the usually only think about the principal and interest and often forget about property taxes and insurance.
The insurance you have on your home will vary. There are insurances to cover loss or damage of your home and/or property in your home, liability insurances to protect against personal injury on your property and special insurance to protect against disasters depending on where you live (such as floods or natural disasters).
You may also be subject to paying mortgage insurance for the life of your loan (depending on terms or refinancing) if you aren’t able to put a 20% down payment.
Talk to your insurance agent and your lender to find out how much more you might expect to pay on insurance.
3) Appraisal, Inspection and Closing Costs
An appraisal to determine the homes value and inspection to evaluate the homes condition are usually performed when a home is sold. When it is solely for the benefit of the buyer, these expenses may fall on the buyer to pay.
Closing costs are incurred at the time of transferring the property to the buyer. As a buyer, the appraisal, inspection, credit reporting, loan origination fees, title searches, escrow deposits (for paying taxes and insurance yearly), underwriting fees, etc. may be included in your closing costs. The amount of fees will vary and some closing costs will be the responsibility of the seller. All these fees may be absorbed into the mortgage and payed over the life of the loan.
4) Fixing Up the Property
Will the home your buying need some fixing up and repairs? Or will you be updating the look with new paint and carpet?
Be sure to think about what costs would be involved with fixing up the property, even if you plan to DIY the updates. DIY may include purchasing extra tools that you didn’t previously own.
5) Furniture and Appliances
Typically, new homeowners will have more space to fill when they purchase a new home.
While it’s fun to move in and make it your own this is another cost that can quickly add up. Decide what you need and what perhaps can wait while you save up for it.
Consider purchasing used to save money if you can find good quality that will last.
When you own the home, you no longer have a landlord to call with plumbing issues, the AC quits working or if the roof leaks.
You’ll want to start a fund for maintaining your home (called a sinking fund). Add a little money to a savings account each month so that when something in your home calls it quits (which is inevitable) you’ll be able to afford to fix it or replace it.
7) Unfinished Basements
In some areas the idea of an unfinished basement is a great idea. It lowers the price of the home and will allow you to later design and finish the basement to your liking.
Finishing basements can be very expensive and run more then $10,000 depending on what you decide to add to your home. Think about how long you want to wait to finish your basement and what money you’ll need to set aside to make updates to the home.
Finishing a basement will add value to the home, so it’s not all bad, but it needs to be thought out financially.
I’m surprised to see how many people move into a new beautiful home and let the yard go to waste. Depending on where you live will decide what your landscaping needs are.
If you have a large property with trees and a lawn you will need to consider water consumption, annual maintenance, plant care, and tools (such as a lawn mower) into your expenses.
You may also have a sprinkling system to maintain. This cannot be neglected or it may cause major damage to your property and a big financial expense if problems develop.
Many cities have ordinances in effect that require a minimum amount of care be given to your property to avoid fines from the city.
9) Utility Costs
Some rental properties include some or all of your utility costs.
When you own a home, these costs will all transfer directly to you and may go up if your property is larger.
Will there be extra fees or services that the city charges to homeowners?
Further, you may want to consider if you are making upgrades to your more frivolous services such as adding extra phone lines, an upgraded internet connection or more television service to extra rooms in your home.
10) HOA Fees
HOA stands for Homeowners Association.
If your home is in an HOA area, you will have extra fees that you pay each month, and regulations placed on your property.
You'll want to make sure the home you are considering is up to standard with the HOA standards because as soon as you buy it will be up to you to get the home within regulations.
Another thing to consider about HOA fees is historically how much they raise them and how frequently. You may also be asked to come up with extra money for upgrades within your community if the HOA is short on funds.
Being Prepared Before You Buy
As a homeowner myself, I’m fully on board with the idea of buying a home. I just want you to be fully aware of the costs involved so you can make the best decision for your family and include the proper expenses in your budget.
Now that you’re aware of some of the extra costs of homeownership, take some steps to prepare for buying your new home.
Here are some smart things you can do to be more prepared.
- Save an emergency fund. I generally recommend starting with one months’ worth of living expenses or $1,000, whichever is more. Include your new home expenses when you’re figuring your emergency fund. This will help keep you afloat when finances hit a setback.
- Pay off debt. This will free up your income to be free to use in a more productive way. It’s also another protection against financial problems in the future because you won’t want Visa calling you everyday when you have your home and family to take care of.
- Live on a budget. This doesn’t have to mean living a life of deprivation. It means you are aware of money coming in and where it’s going when you spend it. Be thoughtful about where your money goes so you can stay comfy in your home for a long time without worry of paying your mortgage.