How Much Home Can I Afford? Breaking Down the Hidden Costs of Home Ownership
Breaking Down the Hidden Costs of Home Ownership
Knowing how much home you can afford is one of the most important steps in buying a home. Because of this, it’s something you should determine before you even start looking. Unfortunately, where many buyers get it wrong is that they only account for the cost of their monthly mortgage in their calculations. They believe that because they can afford a certain amount per month, they can afford the home they want.
The truth is, there are many external factors and hidden expenses that can have a dramatic impact on how much the home will really cost you. These things are important to know because the home you thought you could afford might actually be beyond your budget, and you don’t want to get into that type of situation after you close on the home.
Here are some expenses you need to consider when calculating how much home you can realistically afford.
Home Insurance and Property Taxes
Your home is your largest investment and the bank owns most of it until your loan is paid off, so it needs to be insured. Then there’s your local property taxes, which go towards things like public works, police and fire departments, schools, and so on. Depending on where you live, these expenses can be substantial.
The national average is just over $6,000 per year, but if you live in San Francisco, for example, you can expect to pay as much as $13,000. While these costs are usually included in your monthly mortgage payment, the amounts are rarely factored in when you receive a loan quote. It’s not until closing that you find out just how much these types of expenses add to your payment.
Another type of insurance you may have to pay is private mortgage insurance (PMI). This is a fee that is applied to monthly mortgage payments when less than 20% of the sale price is put down on the home. The amount is typically between 0.5% to 1% of the entire loan amount (based on an annual basis).
If you buy a home, the property is going to need utilities like electricity, gas, and water. Depending on how energy efficient your home is and your power usage, these monthly expenses can be more than you might have expected. According to the U.S. Department of Energy, the average home spends $2,060 on per year for utilities.
Unlike renting, when something goes wrong with the home you own, you are responsible for dealing with the costs. This means you will be performing routine maintenance on your home throughout the year. And, if something does happen, you will need to either fix it yourself or have it professionally repaired, and all this costs money.
Even if it’s something that you can put in a claim with your insurance, you still have the deductible to cover. According to The Balance, you should budget at least $3,000 per year to go toward your home’s maintenance costs, and that’s being conservative. If your home needs a new roof, for example, then your costs will exceed $11K just for that job alone.
Basic Living Expenses
You also can’t forget about your basic living expenses. Things like groceries, entertainment, clothing, retirement plans, auto loans and insurance, and all the other things you need in your life just to live – each of these will require spending some additional money every month.
Buying a home may require you to take stock of your expenses as you find ways to sacrifice, or you can purchase a property that’s affordable enough so that you won’t have to. The key is to know how much you spend and to make sure you can afford the same lifestyle along with your new mortgage.
Buying a Home Is Expensive, But It’s Worth It
While the above expenses can be intimidating, they shouldn’t prevent you from pursuing home ownership. Owning your own home is liberating, and it is also typically a sound financial decision. You just need to carefully consider these expenses when determining how much home you can afford. The answer will give you a guiding rod to follow, so the home you ultimately select fits within your actual budget.