One piece of head wear that I don in my life is my Realtor hat. While I’ve only been in the business for a couple of years as a part-time gig, I have picked up a few tips that I like to pass along to friends and clients. One of them is that you really need to figure out what the true cost of home ownership is. I know that when I was looking to purchase my first home, I was really looking forward to a mortgage payment that was less than the rent I had been paying each month. But owning a home is so much more than that one number. Additionally, you will need to consider PMI, property taxes, homeowner’s insurance, utilities, HOA’s, repairs, and upgrades. Sounds like a lot, right? Yeah, it can get overwhelming, but let’s dig in a little deeper.
1. Mortgage Rates / Payment
If you have never thought about using a Credit Union, check out my post Banks vs. Credit Unions. The interest rates on mortgages are crazy low. Like historically low. Like really really really low. That means that it’s really cheap to borrow money. Interest rates affect how much demand is on the market and can influence whether a particular market is a “buyer’s market” or “seller’s market”. Right now, in my area, there are very few homes on the market, making it tough to get a good deal, especially at the lower price points (<~$110,000). So with deals nowhere to be seen, let’s make sure you can afford what you’re buying.
There are lots of mortgage calculators out there. I personally like this one by bankrate.com. Plug in your numbers and see what you get. Looks pretty reasonable, right? Well, unfortunately, we are about to double it.
2. PMI (Private Mortgage Insurance)
You will need to worry about PMI if you are making an initial down payment less than 20%. Don’t get confused when you hear the work insurance. This is not insurance for you — it’s insurance for the lending institution. You pay this insurance to help cover your risk to the bank or credit union that has lent you money. Here is a great article, again by bankrate.com, that helps explain PMI more in-depth. PMI: Just the Basics. The biggest thing to know about PMI is that it is not automatically removed from your loan, even once you’ve hit the 20% equity mark. By that, I mean that once your loan value is less than 80% of the appraised value of the home, you need to contact your institution and ask them to remove the PMI. If you don’t, you could end up paying more than you need to.
3. Property Taxes / Homeowner’s Insurance
I lumped these two items together because at most financial institutions, you can cover these items with an escrow account. To put something into escrow means to place it in custody of another party, in this case it’s typically your financial institution. They will collect roughly 1/12th of your annual property taxes and homeowner’s insurance premium each month and pay it when needed. They will usually keep a few months’ cushion, so don’t be surprised if it’s more than you thought. Also keep in mind that these rates can vary from year to year, so this number does change.
4. Utilities
This is something that drastically varies by location. In my own personal experience, I have had homes where I only had to pay one utility company, but now I pay four. When you are looking at homes, asking for the average of the last 12 month’s worth of utilities is common. Know what it costs to heat / cool the property so that you can accurately account for your costs.
5. HOA’s
Homeowners’ association dues aren’t usually so expensive that they prevent you from buying, but it is easy to forget about it in your budget. Usually HOA fees covers things like common spaces, road maintenance, and sometimes even trash removal.
6. Repairs & Upgrades
If you aren’t making upgrades on your home, you’re falling behind. Make sure to budget or plan to replace those leaky windows or that old air conditioner, or repair the cabinets. Maintaining a home is expensive, but if you do it right, it will make your home much easier to live-in and sell down the road. Interested in making that upgrade but don’t have any idea of the cost? Check out this cost guide by Fixr. It does a great job of breaking down the costs so that you can adjust based on your particular circumstances.
- I hope that you found this helpful. If you have other ideas or topics that you would consider during a house hunt or budget breakdown, please share them! Also check out this additional article for further hidden costs.
