When purchasing a home it is extremely understand the true cost of buying a home.
Buying a home is an amazing accomplishment. Taking the step from renting to buying a home is something many people dream about. And for most, it will be the most expensive purchase made in their life.
Lenders qualify buyers above the recommended amount that people should spend on a house, leaving a lot of room for buyers to end up buying houses they can’t truly afford.
Because of this, there has been a term coined as “house poor” to describe a person who spends a large portion of their income on home ownership.
Financial consequences of being house poor can include inability to save or to pay down debt and living paycheck to paycheck. Having significantly high housing costs can deter or keep you from having room for other financial priorities such as unexpected emergencies and retirement savings.
Purchasing a home also has a lot of indirect costs associated with it. It’s important to consider these costs as it relates to your budget. We’ll review the true costs of buying a home.
Taxes, PMI and Insurance
Taxes, PMI and insurance fees all go into an escrow that will be in addition cost to your mortgage. Taxes vary from neighborhood to neighborhood and house to house. Taxes alone can be a deterring factor in selecting a home because it can drastically affect your monthly payment.
Your annual tax is calculated according to your local tax rate and your property value. To calculate your potential annual property tax, multiply the tax rate by the homes assessed value. You can then divide the annual amount by 12 to assess your monthly installment.
PROPERTY TAX RATE * ASSESSED VALUE = ANNUAL PROPERTY TAX
Maintenance
Unlike renting where you can call your landlord to handle issues related to the maintenance of your house, you don’t have the same luxury as a homeowner. Maintenance costs such as landscaping, plumbing, and furnace and hot water tank installs can set you back thousands of dollars. Updating roofs, windows and other structural issues can also be expensive.
According to a Home Advisor report, homeowners spend an average of $1,105 on annual maintenance. Costs can vary and certain traits of a home such as the age of a home can vastly increase maintenance costs.
Experts recommend to budget at least 1% of your homes value each year for maintenance. For example, if your home is valued at $200,000, you should budget $2,000 a year for upkeep.
Association fees
Many communities have a homeowner’s association to help maintain a cohesive atmosphere in the neighborhood. When you buy a condo within an association, there is often an HOA fee associated.
HOA fees can drive your housing costs significantly.
Utilities
Utility costs aren’t factored into your mortgage. If you are moving into a bigger space that will utilize more utilities, your costs may increase. If you have an HOA, some utilities may be factored into association fees.
Decor
People underestimate the cost of furniture. If furnishing a new space or furnishing a larger space, it’s important to consider the cost associated with home décor.
Home décor is not cheap and needs to be accounted for in your move in calculations.
Follow the 25-30 Rule
When it comes to how much house you should purchase, an important rule to live by is the 25/30% rule. Most experts agree that people should spend no more than 25-30 percent of their take home income on housing expenses.
This means if your monthly take home pay is $4000, you shouldn’t spend any more than $1200 on housing expenses.
Staying within this limit will allow you to have flexibility in your budget for other expenses, including debt and savings.
Take away
Being house poor is avoidable It is important to understand the total commitment and costs of buying a home. Make an educated and informed decision that will put you in a favorable position and that will take your budget into consideration.
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