Don’t Confuse the Price of a Home With the Cost of Homeownership
Before you start shopping for a home, it is a good idea to get pre-approved for a mortgage. Your lender will provide you a letter telling you the maximum amount for which you qualify. However, just because you can afford the mortgage up to a certain amount does not mean you can afford to buy a home at that price – the cost of homeownership is a different number than the home’s price itself.
When dealing with the shortages of affordable housing today and escalation prices, many buyers—especially first-time buyers—exceed their budgets. A recent study of real estate trends found that one-third of buyers exceed their initial budget when buying a home (32 percent), and nearly half of all buyers of brand-new homes pay north of budget (48 percent). First-time buyers are more likely to exceed their budget (39 percent) than repeat buyers (26 percent).
When buyers confuse their mortgage maximums with the amount they can pay for a home, they can run into trouble unless they have access to cash reserves. Here are some of the expenses associated with homeownership for which buyers should budget.
Closing costs. Depending on local laws and customers and the service providers you choose, closing costs can run as high as five percent of the purchase price. New federal regulations require lenders to provide you with detailed estimates when you apply for a mortgage after your contract on a home has been accepted. Closing costs paid by buyers typically include lender fees and expenses, inspection, title search and insurance, settlement services, homeowner insurance, transfer taxes and may also include pest and radon inspection and survey.
Moving, repairs and decorating. Most new owners budget redecorating and minor repairs as well as moving costs.
Utilities, insurance, and taxes. Sellers usually provide a complete list of utility and property tax expenses during the selling process. First-time buyers who are accustomed to renting may be surprised by ongoing costs of homeownership. Lenders require owners to carry homeowners’ insurance and take out mortgage insurance if they put down less than 20 percent when buying the home.
Ongoing maintenance. The average homeowner pays $1126 a month for home maintenance. Obviously, the amount varies by the age, size and condition of the home and the ability of owners to do repairs themselves.
Contingencies. It is a good idea to budget to save a small amount each year for unanticipated expenses. The failure of a costly system like air conditioning or furnace could put a big dent in your annual budget.
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