Buying a house is an exciting proposal, providing some equity and stability in your life, but how much can you really afford, despite what the lender says you’re qualified for?
The True Cost of a Home
When you’re buying a house, the price tag isn’t just about your mortgage, closing costs and taxes. You need to consider many other expenses and future outlays never touched upon by your lender.
Your lender only predicts what you can qualify for based on your ability to repay the loan. Yes, your monthly debt-to-income ratio should be at a certain level, usually below 43 percent, according to the Consumer Financial Protection Bureau. In other words, your car loans, student loans, credit card bills, and mortgage shouldn’t go over 43 percent of your gross monthly income.
However, this number doesn’t reveal your dreams of taking a long European vacation in a few years or your hopes of having two children in the next five years. These life goals cost money. Your personal objectives will have an impact on your budget and the affordability of homeownership.
Key Factors to Consider When Buying a House
Here are some expenses and situations to consider before buying a house:
- Private Mortgage Insurance (PMI): Many borrowers would love to put down a 20 percent down payment to avoid private mortgage insurance, but if that’s all the cash you have, it might be smart to save some of it for furniture, moving expenses, new appliances or unexpected costs, such as buying a lawn mower. The cost of PMI can be anywhere from half a percent to almost 6 percent of the principal amount of the loan depending on the down payment, the type of loan (fixed or adjustable interest rate), the term of the loan and your credit score, according to the Texas Department of Insurance.
- Property Taxes: When you own a home, the government wants its share, too. According to WalletHub, the average American household spends $2,127 on property taxes each year. Depending on your state and county, taxes can add up quickly.
- Homeowners Association (HOA) Fees: If you’re moving into a condo, a gated community or another particular neighborhood, you’ll most likely have to pay HOA fees. These fees cover costs of landscaping, sidewalks and elevators, among other common areas. Depending on the area of the country and the price of the property, those fees can reach hundreds or even thousands of dollars per year.
- Retirement Contributions: Everyone wants to have enough money stored away to retire without missing a beat in their lifestyle, but putting off contributions to your retirement fund only deters this dream. Compound interest on your retirement fund is an amazing factor. In fact, Business Insider calculated how much you need to save each month at certain ages to reach $1 million by age 65. If you start at age 25, it’s only $500 a month. If you wait until you’re 35 years old, it’ll take about $1,000 a month to catch up.
- House Upkeep: Just like taking care of yourself, your home will require upkeep to maintain its value and functionality. Depending on what needs to be replaced or fixed, homeowners on average spend between 1 and 4 percent of a home’s value annually, according to U.S. News & World Report. Sometimes, things just happen, and suddenly the water heater, refrigerator and furnace all need replacement at the same time. If you want to increase the value of your home throughout the years, updating rooms, such as the kitchen and the bathrooms, is essential to selling at a good price.
Total Cost Scenario
OK, let’s get down to the nitty-gritty of what buying a home could actually cost you. Consider someone buying a $250,000 home in Indiana with property taxes at .88 percent. They put 10 percent down, which makes the loan $225,000. It’s a 30-year loan with the fixed rate of 4 percent. Because 20 percent wasn’t put down, PMI is then added to the monthly payments at 1 percent of the loan amount. Home insurance is also a must when someone gets a house loan; that usually costs about .5 percent of the home’s value. Here’s how all these costs break down and add up per month:
- Interest and Principal: $1,074
- PMI: $111
- Taxes: $184
- Homeowner’s insurance: $67
- Total cost per month: $1,436
Mapping out your budget with these considerations included is a smart way to decide if buying a house now is a good idea. Talk things out with your accountant, financial adviser, lawyer or whomever you trust. It’s all about balance and planning before you feel overwhelmed with too many bills and a mortgage with little leeway for your budget.