How Much Home can You Afford?
When planning to buy a home you’ll have many questions to consider: Where will you live? What neighborhood will be the best fit? What type of home do you want to live in: single family, condominium or townhome? Each of these answers impacts the costs of owning a home.
It’s important to understand not only what you qualify for in a loan, but what you can and want to spend on this portion of your overall living expenses. Buy the home that you can truly afford so you can have peace of mind when paying your monthly bills.
Total Monthly Expenses
When determining how much house you can afford, start with the loan qualification process, but don’t stop there. It’s also important to consider your personal circumstances. Remember the monthly payment you feel comfortable making may be less than the lender indicates you can manage – and that’s OK. Although you may pre-qualify for a larger loan amount or a higher monthly payment, you know best what amount you feel comfortable paying each month.
The lender’s calculation of how much you can borrow takes into account:
the mortgage payment for principal and interest
the escrow payment for mortgage insurance (if applicable), annual taxes and property insurance
From there you should also consider other costs of ownership: utilities, lawn care, maintenance and potential homeowner’s dues, and make sure to factor them into your monthly budget.
Let’s look at these extra costs:
How Much Home Can You Heat or Cool?
Your utility costs will vary depending on the property. Homes with more square footage or vaulted ceilings may mean higher utility bills. Newer homes are generally more energy efficient than older homes. Upgrades to an older home can improve the efficiency but may increase the purchase price.
The best way to calculate utility bills for a specific home is to look at past utility costs. You can find these costs by checking with the utility company or the seller. Utilities include water, gas and electric and should be added to your expected total monthly home ownership costs.
With a House Comes a Lawn…and Lawn Care
In general, homeowners either love landscaping or hate it. If you don’t want to spend time on lawn maintenance, a condominium or townhome can minimize lawn care; however, you may have to pay homeowner’s dues to cover maintenance of common areas. If you’re interested in a single-family home, take a close look at the yard. Are there extensive flower beds that you’ll have to maintain? How long will it take to mow? How big is the lot? Lawn layout and size will determine the amount and cost of upkeep required.
Will Maintenance Be a Money Pit?
Look at ongoing maintenance for both the short and long term. What is the condition of the roof, furnace, air conditioning and other big-ticket systems? Does the home need immediate repair or is it in move-in-ready condition? Think about both the time and cost for required repairs and estimate costs for long-term maintenance. Some homeowners find it helpful to purchase a home warranty to help stabilize maintenance costs. Depending on the policy, warranties can cover basic repairs as well as system and appliance maintenance.
As a Homeowner, Do You Owe Dues?
Homeowner’s dues are used in many developments to offset the costs of the maintenance and use of extras like a neighborhood pool, gated community, playground, tennis court, gym, walking trails and common property. Find out if your new neighborhood has required homeowner’s dues and factor these costs into your monthly budget. In addition to the current dues, you may want to ask if improvements are being planned by the association since improvements might raise dues in the near future.
Calculating the total cost of owning a home before you purchase will help you avoid financial surprises. While you may be tempted to buy the biggest and most expensive home a lender will approve for your situation, this can lead you to be “house poor.” It’s hard to enjoy your home to the fullest if you have constant concern over expenses that you didn’t think about before you signed the papers. By considering these total costs, you can buy a right-sized home that will provide the enjoyment and comfort you expected from owning your own home.