Buying a house is one of the biggest financial and personal investments of a lifetime. Home ownership has long been a milestone of contemporary life, but how do you make the American Dream a reality?
Buying a house is very expensive — in ways you might have never even considered.
Here are a few items that might slip through the cracks when budgeting for a house.
1. Debt-to-Income Ratio
Unless you hit the lottery tomorrow, you will have to incur significant debt in the form of a mortgage to afford buying a house.
As you budget, overestimate how much you think you will pay — it’s better to be surprised and have too much money rather than not enough.
A good place to start is to determine your debt-to-income ratio. This is by no means an end-all, be-all figure, but overall this number can help determine how much you can reasonably afford in mortgage payments while still keeping the lights on in your fancy new home.
Debt-to-income amount will vary depending on loan type and down payment. But, roughly, you should aim to pay around 28 percent of your total monthly income (before taxes) toward mortgage payment.
In total, you do not want to exceed 36 percent of your total income in debt — this includes car payments, student loans, and, of course, your mortgage.
2. Renovations
If you’re building a new house go ahead and skip to the next section, but if you’re like the vast majority of prospective homeowners, you are likely buying an existing house and not starting from scratch.
Based off the home inspection, you may want, or need, to make some renovations.
Before you move in, consider if any cosmetic upgrades are necessary — after all it would be much easier to undertake a home makeover while the house is empty.
Evaluate if your new home will need new carpeting, paint, etc. that might affect your budget.
Timing is everything when it comes to home renovations — if you’re not able to complete all upgrades in time for your move-in date, you are likely to incur even more costs.
There’s a possibility you will need to pay for storage, or maybe even an intermittent home, until renovations wrap up.
3. Insurance
You’ve invested all this time and money into this new home, so now you need to be sure it’s protected.
Many people choose to add homeowners’ insurance to an existing plan. When bundled with other policies, such as auto or life insurance, you can receive discounts and pay close to nothing.
Homeowners insurance can often be paid as part of the mortgage and managed through a separate escrow account under your main loan.
This way, when homeowners’ insurance costs are deducted, you won’t even notice — as long as you budgeted for it.
4. Taxes
Benjamin Franklin said “nothing in life is certain but death and taxes.” Mr. Franklin probably wasn’t prophesying property tax, but the sentiment still rings true.
The amount you pay in property tax each year will be determined by a local tax assessor. The tax rate will vary depending on your location, but the average property tax rate is 1.15 percent.
That means if you own a $200,000 house, you will pay around $2300 in taxes.
5. Down Payment
These days you can expect to pay a 20 percent down payment. This might seem daunting at first — being expected to say goodbye to part of, if not all of, a year’s salary — but in the end you will thank yourself for the financial head start.
Without a substantial down payment to support your loan, lenders will look to guarantee payment in another, more expensive, way — private mortgage insurance.
PMI is a way for a mortgage company to protect itself in the event you default on your loan. On the surface PMI seems like a good way for prospective homeowners to secure a house without a large down payment. But, be wary.
PMI costs between 0.5-1 percent of the entire loan amount per year.
At first that might seem cheaper than paying a large, upfront lump sum, but PMI cost adds up.
A $200,000 loan would cost around $2000 a year. Over a forty year mortgage you will end up paying upwards of $80,000 in PMI.
For that price you could have paid for two down payments — or bought a nice new car for that matter.
6. Maintenance
Gone are the days of calling maintenance to solve your property problems. As a homeowner, repairs, extermination, strange noises, and broken toilets are now your responsibility, which means they are also on your dime.
Maintenance is one of the major sacrifices of moving from renting to owning a house. You will need to budget for unexpected costs — even regular wear and tear will rack up costs.
Homeowners insurance can cover some repairs, but using it can lead to increased premiums, and the cost of the repair is subject to your deductible.
7. Additional costs
You would think given the amount you pay for your mortgage that it would be the end of up-front costs, but unfortunately that’s just the beginning.
Several other fees come with closing on a home that many prospective buyers overlook:
- Application fee — Lenders charge a fee to apply for a mortgage, and this can cost a couple hundred dollars.
- Closing costs — You closed on a home. Yay! But first, stacks of paperwork have to be reviewed by several private and government agencies. According to FICA, closing costs can run between 2-3 percent of the cost of the sale. Lenders legally have to detail all of these expenses in a contract, so you won’t be blindsided, but if anything fishy shows up, be sure to ask questions.
- Home inspection — This step is separate from the home appraisal, which determines the value of the home. Home inspections are designed to uncover any issues that might exist with the home and offer owners full transparency if they choose to fix anything up. Home inspections can cost several hundred dollars.
Based off this list it might seem like buying a home comes at a huge cost and little return, but that’s actually not true.
Many people feel personally fulfilled to lay down roots and settle into a place they can call their own. Plus, from a financial standpoint, home ownership actually has many perks.
Mortgages are considered “good” debt that will improve your credit score over time — if you’re responsible.
Timely payment and loan type factor into your credit score, so if you’re able to regularly pay a big-ticket loan, such as a mortgage, your score will improve.
A credit report with nothing but credit cards will not be as impressive as on-time mortgage payments.
Herein lies the catch-22 of credit — in order to qualify for a mortgage you have to have good credit to begin with. You won’t be able to reap the personal and financial benefits of home ownership if your credit is unable to convince lenders you can handle a six-figure loan. This is where credit repair comes in.
Credit repair professionals will dispute inaccurate and unfair credit items to provide members with the credit report they deserve. Prospective homeowners can fix credit problems, garner lower interest rates, and improve their likelihood of mortgage approval with the help of professional credit repair.
