- JR Hevron - MortgageLoan.com
Friday, Mar 11, 2011
The cost of home ownership is more than just your mortgage payment. Take note of these seven hidden costs and be prepared for the actual payments.
When you are looking for a mortgage, there is a huge difference between what you qualify for and what you can afford. Unfortunately, many lenders and online calculators use the terms âaffordâ and âqualify forâ interchangeably. They are not the same thing!
âIf the bank tells you that you can afford a mortgage of $1500 a month,â says Gil Bricault, a broker associate at The Family Team at Coldwell Banker Cahoone in Westerly, Rhode Island, âthat may be technically true. But if thatâs really the maximum that you can pay, thereâs really no slack, no room for errorâespecially if you have a bad month or if you or your partner loses your job.â
Some say that you should add 40% to your base mortgage payment to get the amount that you will eventually pay. Just like with online calculators, itâs a good figure to start with. In the end, though, to figure out the amount that you will actually end up paying on a monthly basis, youâll need to do a much more nuanced calculation. Sadly, there is no easy, cookie cutter method for figuring this out.
Read on for seven costs that you should factor into your final equation when budgeting for your monthly expenses:
1) Emergency Fund
While an emergency fund isnât a monthly payment, per se, it is something that you should be contributing to regularly. âThe first advice that I give to buyers,â says Gil Bricault,â is to not cut themselves too short when they are budgeting a down payment. They should make sure that they have at least two to four thousand dollars in some sort of emergency fund.â
Again, thereâs no cookie cutter formula for how much you should have on hand in your emergency fund. Keep in mind, though, that if you live in a more expensive house, everything is going to cost more to fix.
Also, when thinking about how much to save, consider the age of your house. âIf you buy a 35-year-old home with a 35-year-old heating system with a 20-year-old roof, thereâs a greater probability that something will go wrong than if it was a brand new home,â says Bricault. âThe older the house, the more money that I would have available.â
The expense of monthly house maintenance is something that pays off long term. Things that are small problems today become big problems tomorrowâthen youâll really need to tap into that emergency fund.
Things that come under the topic of regular maintenance include lawn, landscaping, pest control, and repairs (plumbing, broken faucets, windows, etc.). This cost is going to vary month to month, but $100 is generally a good average amount to set aside.
In terms of preventative maintenance, you should also have your heating/ac system looked at twice a year to make sure that it is working properly. The cost of the inspections will take care of problems before they get bigger and will save you money on monthly cooling and heating costs with a more efficient system.
Some other things to think about: if you donât have public water, you should be testing your well every year for bacteria; if you have a private septic system, you should plan to empty it every couple of years.
Utilities are a monthly expense that is at least a little bit more predictable. However, if youâve been a renter up till now, you may end up paying for more than you are used to. Plan to pay for electricity, heating, cooling, water, and sewer.
To get an estimate, ask local utility companies to provide you with the monthly average utility bills for the seller. Keep in mind that these figures may not be completely representative. âYou need to think in terms of who has been living in the house,â advises Bricault. âIf youâve got three teenage girls and the previous tenants were a middle-aged couple who was out of the house all of the time, your water bill might be twice as much.â
Overall, cover yourself by budgeting more for utilities than you think that theyâll cost. âI think youâll always find that your heating cost runs a little higher than you thought,â says Bricault. âAdd 10-15% in your mind. If you think itâs going to be $1000 a year on heating oil, itâs probably going to be $1150.â
4) Property Taxes
This is another more predictable monthly cost. However, donât just go on what is quoted on the house listing. That figure is often based on the old assessed value of the house. call your county property assessor's office to get a more accurate estimate. Local tax rates vary, but your home is typically taxed on its assessed value, an amount that is equal to a fraction of its appraised value, which can change.
In this economy, you can expect regular increases in your taxes. âTaxes are going to go up. Real estate taxes, particularly,â says Bricault. âI donât know of any communities out there that are not in trouble. At the end of the day, somebody has to write the check and itâs always on the back of the homeowners. When you look at the rate of the growth in taxes, itâs far above the rate of inflation. Just assume that there are no bargains in taxes and theyâre only going to go up.
Homeownerâs insurance protects you from fire and theft. Flood insurance is a whole different policy and you may be required to purchase it if you live in a flood-prone area.
Again, what the current homeowner has the house insured for may be irrelevant. âYou should get a quote up front,â says Bricault. âThe bank is going to want the house insured to at least the mortgage value and we always recommend to our clients that they get it insured to the replacement cost. Get an actual quote or you could be in for a big surprise.â
If you couldnât pay the full 20% of the value of the house for your down payment, youâll also need to purchase private mortgage insurance, which will add to your monthly charges. Itâs one reason among many to wait till you have that 20% before getting a mortgage.
6) Association Fees
If you are purchasing a home in a subdivision, a condominium, or even an apartment, you may have to pay association fees or maintenance fees to keep up the common areas and pay for shared expenses like lawn mowing, security, or a front-desk attendant. These fees vary, but can add up to more than $100 a month.
7) Home Improvements
Hereâs another cost thatâs hard to predict. Once you own your own home and can do pretty much whatever you want with it, youâre going to get the urge to upgrade, replace, and paint things.
For this one, the costs are not just in cash, but also in your time. Home improvements take a lot of time and work and if you are a new homeowner, you will likely do a lot of them yourself. You have to consider how much you get paid and whether it is better to spend that time making more money or paying somebody to do the upgrades for you.
Thinking about the hidden costs of home ownership is not fun. Itâs necessary to budget for them, though, or you might end up unable to make your payments at some point down the road.
Buying a home is such an emotional decision,â says Bricault. âItâs kind of like falling in love, but at some point you have to become objective. None of these expenses are reasons not to buy a house. I still think that youâre better off controlling your future by owning, but I think that you have to go into it with both eyes open.â
Ultimately, your realtor and broker should help you to figure out these hidden expenses. âIf youâve got a good realtor and a good mortgage company,â says Bricault, âtheyâll touch on all of these things.â How do you know if you donât have a good realtor or mortgage company? âSimple. You'll know if they talk more about the house and not about you and your finances!â