Owning a home can be a substantial investment of time and money and when you’re looking online to see how much you can afford to spend on a house, you might not be calculating all of your costs correctly. Creating a detailed and accurate budget is the only way to determine if you are really in a position to afford a home, because too many prospective buyers forget to factor in all of the expenses that come with home ownership.
Most think that if they can manage the mortgage payment every month, then they are able to afford that home. Unfortunately that’s not actually the case. The mortgage expense is just the beginning.
The truth of the matter is that you’re going to be expected to come up with a lot more money to cover a whole range of other expenses. To help you better understand the numbers associated with owning your home, here are the six major costs that you need to prepare for as you calculate whether or not you can actually afford that house.
There’s no way around this expense and you’re typically expected to pay your property taxes twice a year, though the laws are different in each state. The amount you pay is also going to vary based on where you live. Some states don’t have property taxes which makes them an attractive region in which to live, while other states could charge as much as 4%. Since you must pay this cost, it might make sense to seek out a home where these taxes are low or non-existent. The best states to explore for their low property taxes are places like Hawaii, Alabama, West Virginia, and Washington D.C.
Private Mortgage Insurance
Although this home ownership cost could go away, you may still need to factor it into your budget. You may be wondering why you need to pay this fee. Private mortgage insurance (PMI) is put in place to ensure that your lender is paid back in full. Should you default on your loan, the insurance kicks in and the payments are made for you from the insurance policy. The costs to you are in the form of the monthly premiums that you must pay, it works in much the same fashion as any other insurance policy. If you purchase your home with a down payment that is less than 20% of the cost, then you will most likely be required to purchase PMI, however, once you’ve made a certain number of payments to your lender, you have the option to cancel the policy.
Before you buy any home you’re going to need to have it fully inspected. This is usually the next step after an offer has been made and you’ve put up your initial payment (which is called “earnest money”) to show the buyer you’re serious about closing this transaction. But before you do that, you need to have a professional home inspector come in to assess the overall condition of the dwelling. The inspection will determine if the foundation is sound, the construction is sturdy, everything is working properly, and above all, to make sure the house is safe to live in. It’s not a requirement by any state or federal laws to get an inspection, but it’s just a smart thing to do and it protects your investment. This is not an ongoing expense, you only need to pay for an inspection once, but the cost could be a few hundred dollars.
This is where those additional home ownership costs can really begin to add up. These expenditures are paid when you close the deal on your home. Sounds simple enough, except for the fact that these costs may incorporate any number of things from an application fee, attorneys fees, escrow fees, courier fees, origination fee, survey fees, underwriting fees, and the list goes on. The fees you might be asked to pay will vary from state to state, but the average cost to you will be in the range of anywhere form 2% to 5% of the purchase price on the home. Which means if you buy a property for $100,000 you could be charged as much as an additional $5,000 to pay off all of these closing costs. The good news is that some of these costs are negotiable and others are entirely unnecessary, so you may be able to convince your lender to waive them. This is one reason why choosing the right lender is so important, you don’t want to be gouged for every fee under the sun just to buy a house.
This one is typically mandatory if you paid for the home with a loan. Many lenders will require you to have homeowners insurance and you won’t be able to close unless you have it. This type of policy is similar to owning car insurance, you must have homeowners insurance to protect your home and other assets in the event that the home is destroyed, vandalized, robbed, or someone slips and falls or their property gets damaged while in or around the house.
Homeowners Association Fees
HOA fees are also an unavoidable expense if you have purchased a home or condominium that is part of a complex run by a homeowners association. These fees will typically vary depending on the association. These fees usually cover standard maintenance of the community, whether it’s the exterior of the home, the lawn care, shoveling snow, if there’s a pool the fees will cover the standard upkeep needed for that as well. The amount isn’t a significant expense but it still needs to be considered when you’re budgeting for the home you want. If you’re purchasing a standalone property that isn’t part of a complex, you’re still going to need to factor in maintenance costs around the house. That means hiring landscapers to mow the lawn and prune the shrubs or doing it yourself, in which case, you may need to buy the tools necessary to get the job done.