When buying a home, many first time buyers aren’t fully aware of all the costs that go into paying for real estate on a monthly basis and may face sticker shock after purchasing a new home or not be approved for a mortgage after making an offer due to some these costs. Before making an offer, I recommend estimating your total monthly payment by adding the below homeowner expenses together and making judgement call on whether or not you will be able to really afford that monthly cost.
Mortgage + Mortgage Insurance
There are a lot of great mortgage calculators out there that will tell you how much you will pay on a monthly basis depending on your mortgage loan term. I personally like:
http://bretwhissel.net/amortization/amortize.html
As it’s easy to change loan term and see the loan principal balance during the lifecycle of the loan. You can also enter the dollar amount you would like to pay in a monthly mortgage cost on this site and work back to how much you can borrow. Most bank sites have a today’s rates section that supply loan terms and current interest rates. Most borrowers prefer the fix rate products, as payments on principal and interest will never change through the lifecycle of the loan. Variable interest rate loans – ARMs – will adjust depending on changes to the prime interest rate.
When calculating mortgage affordability, it is important to consider the amount of down payment you can make on a home. Generally, if you intend to put less than 20% of your home’s purchase price out of pocket, your mortgage provider will require you the buy mortgage insurance – PMI. Mortgage insurance protects the bank in the event you default on your loan. If you are looking at a down payment less than 20%, you can use a PMI calculator to get a rough estimate of PMI on your property:
http://www.goodmortgage.com/Calculators/PMI.html
Property Taxes
Property taxes quickly become homeowner’s least favorite type of tax, as it is due irrespective of the homeowner’s income. Property taxes are generally calculated based on the assessed value of the property and land value. Property taxes can vary wildly between different taxing districts. The most recent property tax value should be listed on the property listing. It is generally a good idea to estimate your monthly tax burden at 110% of the previous year’s tax value in order to compensate for any tax increases, then divide that figure by 12 to figure out our monthly tax burden.
Homeowners Association Fees
If the property you are specing is in an home owners association, you will generally need to pay dues or fees to the association. These fees should be listed on the MLS. Check with the real estate agent to see if there are any special assessments outstanding for property projects, as you will want to negotiate the payment of these into the sale offer. It’s important to read any sort of association documentation, budget, and meeting notes to see if the association is planning any up-and-coming repairs or projects, as these may translate to increased fees or a special assessment in the near future.
Homeowners Insurance
Most of your mortgage providers will require that you purchase some form of homeowners insurance to cover your costs in the event of an emergency. I would recommend purchasing insurance even in the event you are making a cash purchase as a home emergency can quickly escalate to expensive levels. You can typically get a quick quote using the real estate list through an insurance company’s website to use in the quote. It’s important to note that the rate you are pulling is
just a quote and may increase when you reach the underwriting phase.
Property Maintenance
Real estate experts typically recommend that you estimate maintenance costs of 1-4% of the property value per year. Condo owners typically are on the lower end of this spectrum, due to most of the structure on the property being owned in common by the association. It’s important to inspect and review the condition of your property when estimating your maintenance value. Newer or recently renovated properties are typically lower maintenance right off the bat whereas older homes have increasing maintenance costs.
Utilities
Listings are now starting to include an average monthly utility cost, which can make estimating the price of utilities much easier. You also ask the selling agent to try give you a copy of recent utility bills. Try to check out a unit’s mechanicals, as older heating, air, and water heaters are generally less efficient than newer models.