Know the true cost of homeownership

Cost of HomeownershipThe first question most homebuyers ask themselves is – how much can I afford? Talking to a banker and obtaining a prequalification is a good first step. A mortgage prequalification will give you an idea of the maximum amount you can borrow for your home. That doesn’t necessarily mean it is the amount you should borrow.  

There are more costs associated with owning a home than just your mortgage. It’s important to fully understand all the monthly expenses before you sign the papers. We’ve gathered the following list to help you make informed decisions associated with your purchase. 

Down payment and closing costs – When you purchase a home be prepared to pay a down payment and closing costs at the time of signing. A traditional down payment is 20%, but many loans can be secured with less. Closing costs are typically 2-5% of your home’s purchase price. Talk to your lender to be better prepared for all the associated costs and fees. 

Mortgage payment – Unless you’re paying cash for your home, the bulk of your monthly expenses will go to mortgage payments. This will include the principal and interest amounts. How much to allocate will depend on your mortgage amount, interest rate, down payment and loan length. You should work with your lender to draft a nmortgage proposal that forecasts your monthly payment amounts based on your prequalification amounts.  

Private mortgage insurance – Private Mortgage Insurance (PMI) is an additional expense for homebuyers that have less than a traditional 20% down payment. This protects the bank in case the buyers default on the loan. Talk to your lender about estimating PMI if you expect to put less than 20% down. Generally, PMI is not a permanent cost and can be removed once your equity reaches 20%. 

Taxes – Property taxes are assessed annually by your local government to pay for things like roads, schools and law enforcement. You may pay these taxes all at once in the spring, or monthly into an escrow account held by your mortgage company. According to the U.S. Census Bureau, the average American household spends $2,197 per year in property taxes. Generally, the more expensive your home, the higher your taxes will be. Check with your local tax collector’s office to check the tax history of any properties you’re considering.  

Homeowners insurance – When you buy a home, you will be required to purchase homeowner’s insurance. The average insurance premium in 2015 was $1,173, according to the most recent data from the Insurance Information Institute. This varies widely depending on where you live and the condition of your house. If you’re purchasing a home in a disaster-prone area, be prepared to pay higher premiums. Don’t forget to factor in flood insurance if you need it. Flood damage is not protected under a regular insurance policy and will require an additional premium. 

Homeowners’ Association – If your selected home is in a Homeowners’ Association (HOA), be sure to check into the costs and regulations. Find out what the dues are and factor these into your budget. You may be required to maintain a specific appearance that could include specific exterior paint, landscaping and even fencing material. Make sure to include these commitments into your overall plan. 

Utilities – You probably expect to pay utilities, but make sure to pay attention to the size and condition of your home when making these calculations. If you currently live in a two-bedroom apartment and you’re moving into 4-bedroom single family home, expenses could drastically increase. Check with the local utility company or talk with your potential neighbors to get an idea of what to expect.  

Yard care – If you haven’t been responsible for this in the past, you could easily underestimate the expense of having a large yard. If you don’t plan to maintain it yourself, make sure to get quotes for hiring a lawn service. Ask neighbors, check online, even check with your real estate agent for recommendations.  

Routine maintenance and repairs – After you buy a home, you will need to take care of its upkeep and maintenance. It can be a bit of a shock when an appliance breaks down and you need to fix or replace it.  Instead of panicking, factor maintenance into your monthly budget. Put a regular amount into a savings account and label it Repair Fund. Aim to set aside 1-2% of home’s value annually for these repairs. If your home is worth $200,000, set aside $2,000-$4,000 per year, or $167-334 per month. 

Becoming a homeowner is a rewarding experience and comes with many perks. Understanding the true cost of ownership can help you to prepare a budget, find a home that fits your needs, and start the ownership journey on a positive note.
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