For anyone, whether you’re a first-time home buyer or a longtime homeowner, buying a home can be an extremely rewarding decision. But you need to be careful not to bite off more than you can chew. Before closing on a property, you need to understand your home expenses to ensure that you’re well prepared. Looking at these recurring expenses helps you figure out if you can afford the home you intend on purchasing.
Once you create a monthly budget (if you don’t already have one), use the following home expenses as a guide to see how they stack up against your current cash flow.
Monthly Principal and Interest Payments
All mortgages have monthly principal and interest payments. The principal is the money you originally borrowed for the home. The interest is the fee you pay the lender in order to borrow the money. Initially, the biggest chunk of your monthly payments will go towards interest. As time goes on, you’ll be paying off more of the principal balance on the loan.
For example, if you took out a $500,000 loan at a 4% fixed rate for 30 years, you might initially pay about $720 towards the principal and $1,670 towards interest. By the 20th year of your loan, you would be paying about $1,540 towards the principal and $850 towards in interest.
Property Taxes and Insurance
You’ll be required to pay property taxes which typically go to the local government entity. The amount you pay in property taxes annually depends on where you live and your home’s value. To help estimate these costs, ask your real estate agent or use an online calculator.
Homeowners insurance is another expense to consider and can help protect you in case of any damage to the home in the future. Zillow estimates that you’ll pay about $35 per month for every $100,000 of home value. That means if your home is worth $300,000, you’ll need to budget for a $105 insurance premium. Of course, this amount varies based on location.
PMI or Private Mortgage Insurance
If you make less than a 20% down payment on your home, you will usually be required to purchase private mortgage insurance (PMI). This protects the lender in case of default and could cost you $30 to $70 per month for every $100,000 that you borrowed, according to Zillow. You can stop paying PMI when you have 20% equity in the home, but in the meantime it will add significantly to your monthly payment.
There are ways to get a mortgage without PMI. The most straightforward way is to put a 20% down payment on your mortgage.
Maintenance and Upgrades
You may like the home you’re purchasing, but you may have some ideas in mind to remodel a few things or make home improvements. If so, these costs should be factored into your monthly budget. That way, you can prioritize what you want done and have enough saved to stick to those plans. As for how much to set aside, that depends on what you want to get done. It could require anywhere from a few hundred dollars to a few thousand dollars per month. Talk to a contractor to find out how much a remodel could cost.
If you plan ahead, you will have money set aside to make your desired remodels. Otherwise, you might need to use a home equity program, a HELOC, or a home improvement loan. While these can be appropriate in the right circumstances, it can be risky to take out a loan against your home equity.
Even if you don’t plan on making any significant changes to your home, you’ll still need to account for maintenance costs. One rule of thumb is to set aside 1% of your home’s purchase price annually. Older homes may need more repairs and major appliances replaced, so account for those so you don’t get a nasty surprise when you find out that the heating system needs repaired. A qualified home inspector should be able to tell you the condition of a home and estimate when you’ll need to replace major parts like the roof and heating system.
Utilities and Ongoing Monthly Expenses
If you’re currently renting, you may have some of your utilities already covered. However, as a homeowner, you’re responsible for all of them. These bills include gas, garbage, electricity and water. Check with the seller for an estimate of how much it costs. Also, if there are any other expenses such as homeowners association fees, ask about those as well. For those who hire out services such as a home security system, landscaping and pool maintenance, factor those in too.
How These Expenses May Differ
It goes without saying that the price of your home will affect your monthly payments. While each home is different, the following breakdowns will give you an idea of what you could be paying. Let’s assume both mortgages are for a 30 year term at a 4% fixed rate in Orlando, FL:
|A $500,000 Home||A $250,000 Home|
|Monthly Principal and Interest Payments: $2,387.08
Property Taxes: $491.67
Private Mortgage Insurance: $208.33
Maintenance and Upgrades: $416.66
Total: (not including utilities) $3,678.74
|Monthly Principal and Interest Payments: $1,193.54
Property Taxes: $245.83
Homeowners Insurance: $87.50
Private Mortgage Insurance: $104.66
Maintenance and Upgrades: $208.33
Total: (not including utilities) $1,839.86
Budgeting for common home expenses before you buy can help make sure that you can actually afford that house. Ask as many questions you need to your real estate agent and lender to ensure you know what you’ll need to pay for. If you do find that you need extra help with securing that home of your dreams, consider the Unison HomeBuyer program. Unison can help you with a down payment so your monthly costs are lower, possibly eliminating the need for PMI.
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