So you are ready to take the leap and buy a house, but do you know how much you should spend? To make sure you are buying a house that meets your needs without overextending yourself, you need to analyze your overall finances so you can find a monthly payment that fits your budget and that you are comfortable with. We are going to break down everything that is included in your monthly payment so you can find the perfect house for you!
Your Monthly Housing Budget
Buying a house is emotional, and sometimes emotional decisions can lead to poor choices. It is easy to get caught up in the excitement of buying a home and place a panic bid on something because you have already lost out on 5 other houses or because you fall in love with the kitchen, completely ignoring the fact that it only has 2 bedrooms when you really need 4. You need to know how much you can spend to make sure you’re making the right decision. So before you get into your car to look for homes, you need to find out what you can afford.
The first thing you want to do is break down every cost it takes to be a homeowner every month. This may include your HOA fees, utilities, monthly mortgage payment, insurance, taxes, landscaping, etc as well as anything that it costs each month to maintain your new home. The biggest mistake that people make is that they assume the only cost they’re going to have is their monthly mortgage payment—and that is not the case.
The easiest way to start is to come up with a monthly budget for all of your housing expenses for the month. Figure out on average what each of the costs is going to be. You can then back into a purchase price that you’re comfortable with.
Mortgage Payment And PMI
To really understand this, let’s break down exactly what your monthly payments consist of. The largest payment is going to be your mortgage. When you go to the bank or the mortgage company to get a loan, your payment consists of your principal and your interest. It is a set monthly total based on the life of the loan and the terms that you took out, and your payment amount to the bank will not change. It stays the same every month for as long as that payment goes on. What does change, is the amount of money from that payment that goes towards the principal and the interest. Every month, you pay a little bit more towards the principal to pay that loan off in the future.
The next largest expense each month will be your real estate taxes. Most mortgage companies and banks will require you to escrow a portion of your taxes each month. To calculate this amount, you take your real estate tax bill and divide it by 12. For example, if the tax bill is $5,000, the monthly cost would be about $416. You include that with your principal and interest payment each month. That goes to the bank, they escrow your tax bill, and then they pay the tax bill for you at the end of the year.
Another cost that you may have is private mortgage insurance or PMI. This is insurance that the lender may require you to have in case you default or stop paying on your loan. If you need to pay PMI, you definitely want to talk with your lender about that. You might be able to put more money down or have more equity in your home to avoid those costs.
Variable Taxes
One big thing I want to talk to you about is your real estate taxes and tax bill. Our taxes can cover a huge range, even with homes on the same block. You could have a home on one block that has a tax bill of $3,000, but across the street, because the home had an addition put on or may have more square footage, the taxes could be double that. Your taxes are dependent on what your house is valued at. So if you buy a house that has had the same owner for 50 years, when you purchase the home your taxes are sure to go up, so keep that in mind.
HOAs And Insurance
Another thing to be aware of are HOA, or homeowners association dues. They greatly vary from community to community. They may cover things like road maintenance, landscaping, or maintaining a community pool or playground. It is very important when budgeting for a home that you know what you will need to pay, as well as what those payments cover.
The final thing you need to look at is homeowner’s insurance. In some areas, you also may need specialized insurance. Homeowners’ insurance can range greatly and any additional insurance, like flood insurance can also be costly—sometimes from $1,000 up to $5,000, depending on how much of the property is in the flood zone.
Most people don’t even think about what type of homeowner’s insurance they are going to need until they’re already under contract. They may end up with sticker shock later, so it is best to budget for this ahead of time. If you call your local agent, they will be happy to help get you an estimate.
Be Wary Of Mortgage Calculators
When most people start to think about buying a home, they begin their search online. At some point they may start playing with mortgage calculators and putting in their budgets to see how much the payments are going to be.
Be warned those calculators do not include all the costs associated with purchasing a house. Many times, we meet buyers and once every cost is spelled out for them they realize that the calculator could have been off by thousands of dollars. Your best bet is to talk to a professional Realtor once you are looking to buy who can help you get pre-approved for your mortgage and start with a realistic budget when house hunting.