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When buying a home, you must consider all of the expenses that you will be responsible for beyond typical financing and purchasing costs. We will discuss the 10 most important expenses you should consider before buying a home.
When you're thinking about buying your first home, you need to understand all the costs involved to help ensure you'll be a successful homeowner. No one buys a home thinking the process will end in a foreclosure or short sale, but unfortunately, many people lose their homes because they become overwhelmed financially.
Of course, you can't prepare for all things, and there is no guarantee that when you buy a house, everything will turn out as expected. But you can prepare for the typical costs of home ownership. Once you know the costs and then plug those costs into your budget, you should understand whether you're ready to buy a house. Identifying all the costs puts you in a much better position than not knowing and being surprised by what many people call "hidden" costs of home ownership, costs many people don't even know about.
This article will discuss the costs most people consider, known as PITI (principal, interest, taxes, and insurance), and some costs many people overlook. Here are 10 costs of home ownership that you should be aware of before you buy a home.
Most people consider the mortgage payment, which consists of principal plus interest, when they budget to buy a home. The interest rate you pay varies based on whether you choose a fixed or adjustable rate mortgage, your credit score, and the type of loan you get.
You can get a good idea on how much of a house you can afford by going to a mortgage lender to see how much they'll preapprove you for. Mortgage lenders look at your income, how much debt you have, your assets, and your credit score to determine whether you qualify for a mortgage loan and for what amount.
Tip: Lenders typically don't factor in some of the hidden costs of home ownership, such as maintenance and repair costs. But you should consider all the costs. Your preapproval amount is a good starting point, but it doesn't give you a complete picture.
The down payment is another cost that most people budget and plan for, but there are hidden costs associated with a down payment if you don't put down 20 percent of the home's purchase price. Your lender might let you put down 10 percent or even 5 percent. An FHA loan lets you put down only 3.5 percent. You might think you're saving money by putting down as little as possible for a down payment, and this might be the only way you can afford a home.
But you will pay extra for not putting down 20 percent, and this extra is called private mortgage insurance (PMI). PMI usually costs between 0.5 percent and 1 percent of the loan. So if your mortgage loan is for $200,000 and you need to pay PMI, figure an extra $2,000 a year, or $167 a month extra. If you can save up the 20 percent before you buy, you can save yourself a lot of money.
Every time you buy a home, you need to pay closing costs, and these costs total between 2 percent and 5 percent of the loan amount. They consist of home appraisal and home inspection fees, title insurance, loan fees to process the paperwork, and more. Closing costs are unavoidable, which is why you should stay in your home for at least five years. Otherwise, you might want to consider waiting to buy until you're confident you can stay for at least that long.
When you were a renter, you didn't have to pay property taxes, but you do as a homeowner. The more expensive the house you buy, the more you'll pay in property taxes. These taxes are ad valorem, which means according to value. The county assesses the value of homes each year to determine how much you'll pay in taxes. Your real estate agent should be able to give you an idea of how much you'll likely have to pay. The average annual property taxes for 2015 ranged from a low of $482 in Hawaii to a high of $3,939 in Illinois. The U.S. average for 2015 was $2,089.
What you pay for homeowners insurance varies depending on the price of your home and its location. The average cost of homeowners insurance for 2015 varied from an annual low of $534 in Idaho to an annual high of $1,991 in Florida. The U.S. average for 2015 was $952.
If you're buying a home in the same area in which you already live, you have a good idea of what you'll pay for utilities. But even so, if your home is substantially larger than your current place, expect to pay more. Ask your real estate agent what you can expect to pay for utilities, particularly if you're moving to a new area. You could also ask the sellers of the home what they typically pay.
Some housing complexes are managed by a homeowners association (HOA), which is a legal entity. If you buy in an HOA development, you must pay the HOA fees. You can find out before you buy whether the property is run by an HOA and how much the annual dues are. The fees vary greatly, from as little as $100 or less a year to $4,800 a year or more. You generally pay higher HOA fees when you buy a condominium versus a single-family home.
Consider what kind of shape the house is in before you buy. You might need to hire a home inspector to find out. The most expensive repairs involve the heating and cooling system, the roof, the foundation, the plumbing, and the electrical. If the house has a problem in any of those areas, you need to consider how much it will cost you to determine whether the house will be worth it to buy. If it does have major issues, try to renegotiate a lower price to offset the costs.
It's usually less expensive to maintain your home that it is to fix something after it breaks. Most homeowners spend between 1 and 4 percent of their home's value on maintaining it. If you try to save that money by not maintaining your home, your home could depreciate. Because your home is probably your biggest asset, you want to keep it in good condition.
You're in control here. But whatever you decide to buy, it'll still cost you. If you want a beautifully decorated home, expect to pay anywhere between 10 percent all the way up to 50 percent of the price of the home to decorate it from scratch.
Once you've added all your potential homeowner costs, see how they compare with the income you bring home. A great goal to shoot for is that your home ownership costs will not be more than 28 percent of your net income.
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