When trying to decide if you can afford to buy a home, it’s common to focus on the mortgage and interest. However, the costs of homeownership are often greater than you think. Many first-time homebuyers who carefully consider what they can afford are surprised when they begin adding up what they’re really paying for their homes. Before you buy a home, it’s important to pay attention to all the costs of homeownership — not just your mortgage payment.
Insurance and Property Taxes
When using a mortgage calculator to determine how much they can afford, many homeowners neglect to include estimates for insurance and property taxes. This is a mistake. Often the insurance and property taxes are included in the monthly payment. So if you figure your monthly payment based only on mortgage and interest, you might be unpleasantly surprised by what it actually costs each month. Property taxes and insurance depend on where you live, so try to get a local estimate, and then add that monthly cost to your mortgage and interest to get a more accurate idea of your monthly mortgage payment. You might not be able to afford as big a house once you add in property taxes and insurance.
Maintenance and Repairs
Renters don’t usually have to worry about upkeep on the property. If something needs to be fixed, you call the landlord or property manager, and someone else fixes it for you — and you don’t have to pay. The same is true for maintenance. When it comes to landscaping, and other maintenance activities like furnace tune-ups, the landlord takes care of it.
When you buy your own home, this changes. You are now in charge of maintenance and repairs. If a pipe bursts, you need to make all the phone calls to get someone in to clean up and repair the damage. You might have insurance to help you take care of the cost, but, even so, you might have a deductible to pay. If the roof needs to be replaced, you will have to pay for it. You also take care of the yard maintenance and pay for appliance tune-ups. It costs money to maintain your yard, from the water you use with the sprinkler system to the fertilizer you buy for the lawn.
If you are “upgrading” from an apartment to a house, chances are that you will have higher utility bills. It takes a lot more to heat and cool a 2,000 square-foot house than it does a 1,200 square-foot apartment. Additionally, you might have higher costs to pay, since you might have to pay for trash pickup and other costs. If your current apartment includes utilities, this is something you need to be especially careful about budgeting for, since you haven’t had to think about it before.
Furniture and Other Incidentals
You should also consider the costs of furniture and other incidentals. Many first-time homebuyers are surprised when they realize that they need to buy window treatments and shower curtains. If you have a bigger home, you might need to buy more furniture than you currently have. Others like to get new furniture to go with the new house. However, this just adds to the cost. If you don’t plan for these costs, you can be blindsided, and end up with a bigger bill than you expected.
40 Percent Rule
One way to gauge the affordability of a home is to use what is called the 40 percent rule. The rule is this: Add 40 percent to your estimated mortgage cost to account for other homeownership costs. So, if your mortgage monthly payment is $1,200 per month, you need to plan another $480 per month to account for other homeownership costs. That means that you need to be able to pay $1,680 per month in order to afford your home ownership costs. Remember that this is just a rule of thumb, though. If you live in an area with high property taxes, you might pay just as much each month in taxes as you do for the principal and interest on your mortgage.
One of the things you can do to prepare is to create a fund for maintenance and repairs, and put extra into that account so that when costs do come up, you can afford them without going into debt.