I’ll assume that if you made it this far (this far being part one, which I suppose is really not that far at all), you’ve decided you want to buy a house. I’ll assume that you are buying a house for a good reason, and not just because you want to grill with your bro’s.
On that note, a quick tangent. I suppose I shouldn’t be going on tangents in the first paragraph of the first article on this subject, but this is important. I highly recommend you watch shows like House Hunters and Property Virgins so you can take notes of exactly why not to purchase (or avoid) a house. For example, is there horrific wallpaper in a bedroom? Guess what – you can strip it off! Don’t like the ceiling fan in the family room? It can be changed! Choosing which house to buy based mainly on the size of the margarita bar in the kitchen? Probably not such a great idea.
We’ll get more into the details of what to look for in a house later, but before that it’s important that you figure out if you can actually afford a house. In order to do that, you first need to understand the costs of owning a home.
It is absolutely, positively imperative that you calculate exactly how much all of the various parts of owning a home will cost you, and then decide 1) if you can afford a home at all and 2) what price range you can look at.
Let’s assume you are renting right now. Here are the costs you are concerned with as a renter:
- Renter’s insurance
Not much, eh? Some of you may only have (1), in which case I insist you get renter’s insurance immediately. It can cost, literally, a few dollars a month. It not only covers, say, your apartment burning down, but it also covers thefts from your person and also injuries that occur to others inside your apartment. Pretty important stuff for a few bucks a month.
Of course not everyone pays utilities when renting. Or you may only pay for electricity but not heat, or vice-versa. Also, some rental units charge for things like parking or a garage, so don’t forget about those if that situation applies to you.
Here are the costs of owning a house:
- Homeowner’s insurance
- Property taxes
- Private Mortgage Insurance
I know the term mortgage will be obvious to most people, but if not: Your mortgage is the big chunk of change you pay each month to the bank (instead of a landlord). Your mortgage payments go towards two things: Interest on the loan you take out to pay for the house, and payment for the house itself. The latter is called your principal. These numbers are always combined when talking about the mortgage.
Fun fact about mortgage payments: Say your mortgage payment is $1500 a month. The first year of owning a house, the vast majority of that payment (we’re talking like $1475) goes just towards paying the interest! So even after a full year of “owning” your house, you actually only have a few hundred dollars worth of house ownership.
Kind of like renter’s insurance, but a lot more money, and a lot more important. Renter’s insurance is important, but if your apartment building burns down, you don’t have to worry about rebuilding it.
When you own a home, you own the land it’s on, and the land surrounding it as well (this is referred to as your lot). The city that your land is in taxes you for living there. Those taxes go towards various city services, including the school district, which often has a big impact on your taxes. Property taxes usually range from 0.5%-3% of the assessed value of your house, annually. So a $300,000 house taxed at 1% will cost you $3000 per year.
Private Mortgage Insurance
If you are using less than 20% of the home’s purchase price as your downpayment, you will have to pay private mortgage insurance, or PMI. PMI is basically the price you have to pay to the bank in order for them to feel comfortable with you purchasing a house where your actual stake is less than 20%. Once you reach 20% equity in the house, most lenders will remove the PMI.
PMI is usually about 0.8% of your mortgage cost.
Unlike an apartment, where your dishwasher breaking means nothing more than a call to the landlord, everything that breaks in your house is your responsibility – and it’s not just the appliances you have to worry about, as you’ll soon be repairing items in your house you didn’t even know existed.
This is a tough one to estimate. One month, your microwave may break, and it’s a quick $75 to replace that. But the next month, you might find out your roof needs replacing for $15,000. I’ve read that, over the lifetime of a house, repairs tend to average about 1-4% of the house’s value per year. While you won’t be paying this cost every month, it’s very important to have this money set aside.
Utility costs vary greatly depending on where you live, how big the house is, and the type of system it has. Generally, estimating an increase of about 15% for your electricity bill should be safe, unless your current apartment doesn’t have laundry or a dishwasher. Your heating bill is more difficult to estimate, but you can expect it to increase dramatically. You may not be using electricity in those new rooms you have, but you sure will need to heat them.
Those are all of the major additional expenses you’ll be paying when you own a home. But there are some other expenses to keep in mind as well. For example, are you moving farther from work? Be sure to factor in the additional money you’ll be paying on gas or tolls. Buying a house with a big yard and big driveway? Soon after you move in you’ll need a lawnmower and snow-blower (or snow removal service).
There are also one time costs associated with purchasing a home. Most of these are wrapped up in something called closing costs, which are the sum of the dozen or so fees you pay to banks and lawyers for assisting you with the contractual part of buying a home. You’ll also be paying a home inspector for every house you see, which usually costs between $250-$600. Lastly, if you are hiring movers, you’re looking at around $1000-$2000 in costs there (though that can definitely vary depending on your situation).
There is some good news though. You won’t pay a dime to hire someone to help you look for a house. Instead, your realtor gets paid, in essence, by the seller, who sets aside a commission for both their broker and yours. Of course, in a way you do pay for this, since the seller has to factor that into their costs when deciding on the price to sell their home, but it’s not money directly out of your pocket.
You are now familiar with all of the extra money you’ll be spending after you buy a house. In the next article, we’ll figure out if you can actually afford all of that!