The Cost of a Home Is More Important than the Asking Price
Buying a home? Focused on the asking price? Don’t overlook these other financial considerations that could affect your total cost.
Buying a home that meets your needs for a price you can afford can be a challenge, especially in this post-pandemic seller’s market. See How to Win a Bidding War. Low interest rates and rising home value still could make this the perfect time for you to jump into the real estate market. However, in addition to considering the base price, the down payment and the interest rate you need to make your loan affordable, there are several other things to consider before you take the plunge.
The DTI: The Debt-to-Income ratio—your monthly expenses compared to your income—will be a consideration in determining the approval of your loan. The DTI also gives you better idea of what you can spend on a house payment without having to cut lots of corners and change your lifestyle for the next 10 years. You can find several online calculators and forms that will calculate your DTI, based on the figures you input.
Buy property you can afford now, not later. Even if you’re almost certain you’ll be earning more in a year or two, there might be circumstances that increase the other expenses in your life. Children, schools, a new car, medical bills and home upkeep are examples of substantial costs. Be sure there will be room in your budget to pay your mortgage and still live life according to your plans, even with unexpected expenses.
Don’t underestimate the additional costs. In addition to the price of the home, there are many other costs involved. Ask friends who have gone through the home-buying process. No one will say that it cost less than they planned for. To be safe, understand and over-estimate those additional costs.
Some of the fees and services you can expect to pay for include the following:
- Mortgage application fee: Lenders charge a fee for a mortgage application. The price varies, but can be several hundred dollars.
- Home inspection: An inspection finds any undisclosed problems with the house before purchase. This protects you, the buyer, and gives the owner time to correct problems tied to making a sale. You can expect to pay several hundred dollars for the inspection.
- Closing costs (title, appraisal and origination fees; interest due and escrow deposits): Your real estate agent should inform you each step of the way what you’ll be signing and paying for. You can ask for a list of how much total closing costs will be before the actual date. Closing usually runs about two to three percent of the cost of the house.
- Homeowner’s insurance: Coverage provided by a 3rd party agency to protect your home will be part of your total monthly payment, required and disbursed by your lender from your escrow deposits.
- Mortgage insurance: Coverage for the lender to protect against loan default may be a portion of your total monthly payment, also disbursed by your lender from your escrow deposits.
- Property taxes: As a homeowner, you will make an annual tax payment to the county. This will be a part of your total monthly payment to your lender and disbursed through your escrow until your principle is below a certain percentage of the value of your home. Some tax may be owed upon closing.
- Home warranty: If you’re buying an older home with appliances that are no longer covered by manufacturer warranties, getting a home warranty could be cost-effective. It protects things such as kitchen appliances, ceiling and exhaust fans, plumbing, the furnace, and the sump pump. Chances are high that you’ll face at least one major repair on your new home, so consider whether a home warranty will yield a net savings over that expense.
Expenses you might have after you move in also should be factored into the affordability of the home you’re considering.
- HOA and condo fees: If your new home is a condo, or part of a community with a homeowners association, you’ll pay a monthly fee toward maintenance of shared community features. (See HOAs: Pros & Cons.) The more amenities you get, the more you’ll pay. However, your HOA could cover things that save you money and time, like maintaining the landscaping around your townhouse.
- Maintenance, repairs, renovations, and redecorating: Maintaining your home typically costs about one percent of your home’s value each year. That doesn’t include large unexpected repairs. If you want to renovate part of the house right when you move in, take that into account when considering how large of a home loan you can afford.
- Utilities: If you have been a renter, you probably didn’t pay separately for water, trash pickup, and sewer. And if your new home is larger than your rental, you’ll pay considerably more for electricity and heat. Check the average monthly utility bills for homes in the neighborhood.
- Commuting: If your daily commute changes, you might need to buy a new car, or pay more to maintain and fuel the car you have. A longer commute also cuts into your free time. Don’t underestimate how much you’ll be affected by “just” another 15 minutes each way.
- Community: Sometimes finding a home that has the amenities you want for the price you can afford means moving to a totally different part of town—and leaving your neighborhood friends and activities behind. One thing we often don’t ask ourselves is: What is the price of community?”
If you only focus on the asking price of a home, you will not have a realistic picture of the cost of home ownership and the affordability of what you consider your dream home. Contact your real estate agent and loan officer to learn more details about the initial and ongoing costs of homeownership.