A lot of different factors go into the purchase of a home. They include location, style, square footage, school zoning, and neighborhoods.
But the most important facet of the home search — and of home ownership in general — is the financial aspect. When you’re buying a house, you need to be ready to meet both present and future costs.
How Much Home Can You Afford?
Before we dive into the details of what you need to budget for, let’s take a moment to discuss an essential topic, briefly, that doesn’t get covered nearly enough. We’re talking about affordability and how much house you can reasonably manage to pay for.
There are a variety of schools of thought — some more conservative than others — but one of the best rules is to spend no more than 25 percent of your monthly take-home pay on your mortgage.
If you’re bringing in $3,500 per month, this means your mortgage should be $875 or less. If you’re earning $5,000 per month, you can go up to $1,250. If your take-home pay is $10,000 per month, $2,500 should be a safe number.
Everyone uses a different formula, though. Some say it’s fine to spend as much as 40 to 50 percent of your monthly income on your home, so long as it fits with the rest of your budget. Ultimately, it’s your decision, of course, but you ought to think about affordability in terms of your current financial situation.
Nine Things to Budget For
The reason it’s traditionally been advised that you keep your mortgage payment low is that home ownership features a range of other costs and expenses you should be properly prepared to cover. Failure to account for them could place you in a desperate financial situation eventually.
As you prepare to purchase a home, here are nine of the basic expenses for which you should be budget.
- Closing Costs
The very first item you have to be prepared for is closing costs. These are the fees associated with your home purchase, and may include attorney fees, escrow fees, courier fees, origination fees, prepaid interest, property tax, recording fees, and other costs.
If you add them all up, typically you’ll end up paying roughly 2 percent of the purchase price in closing costs. On a $250,000 home, this means closing costs will be roughly $5,000. The money will be due on the day of closing.
- Property Taxes
Real estate taxes are frequently included in your monthly mortgage payment to the bank, but don’t assume this is the case without asking. If the taxes aren’t prepaid into an escrow account, you’ll have to pay out of pocket once a year. Depending on where you live and how big your home is, this could run into thousands of dollars.
- Homeowner’s Insurance
Again, homeowner’s insurance is often built into your monthly payment and then distributed to the insurance provider from an escrow account, but make sure you verify this. The last thing you want is to find out you have to cut a check every month … something that could throw your budget out of balance.
- HOA Fees
Many neighborhoods and subdivisions have homeowner’s associations that come with HOA fees. If you’re in a really nice subdivision with lots of amenities — such as a pool, clubhouse, tennis courts, playground, etc. — this fee could be pretty hefty. Do the research and make sure you’re prepared for such recurring costs.
- Utility Costs
If you’re moving up in size, your new home is likely going to cost more for utilities. Make sure to investigate these and include such items as cable, Internet service, gas and electricity, water, and trash into your budget.
- Updates and Personalization
Unless you’ve built your own home and had a say in every design detail, the odds are you’re going to want to change a few facets of the house you purchase. Whether cosmetically (for example, painting walls or swapping out cabinet hardware) or structurally (removing walls or adding a room), updates and renovations cost money. Budgeting for them ahead of time will help you personalize your home without leaving you penniless.
- Landscaping and Lawn Maintenance
If you’ve lived in an apartment, condominium, or rental house your entire life, you may not be aware of how much time, energy, and money goes into landscaping and lawn maintenance. Whether you choose to hire someone to do your landscaping for you, or buy the equipment and put in your own sweat equity, it’s not exactly cheap.
- Basic Home Repairs
When you’re a homeowner, all those little repair and maintenance issues you once handed off to your landlord suddenly become your responsibility. And though you might be tempted to ignore them, many problems worsen over time and end up costing more than if you had fixed them appropriately up front.
Although you can’t be prepared for everything, you’ll feel a lot better about your situation if you’ve budgeted for basic home repairs in advance. One popular recommendation says you should set aside 1 percent of the purchase price of the home each year for ongoing maintenance.
Thus, if you purchase a $300,000 home, you should budget $3,000 a year for maintenance. Another rule says to budget $1 per square foot … as in $2,000 per year for a 2,000-square-foot home. Neither system is perfect, but either can be a smart move.
- Major Home Repairs
Minor home maintenance tasks are pretty easy to address. Items such as toilet flanges, air filters, light bulbs, door locks, and windowpanes don’t cost very much.
But you’ll inevitably have years when major home repairs stick you in a bind. A substantial item like a roof, HVAC unit, or kitchen appliance can cost thousands. Budgeting for these ahead of time can give you peace of mind and save you from going into debt.
Contact Green Residential
At Green Residential, we’re widely recognized as the most respected name in Houston real estate. Whether you’re looking to buy a home, sell your house, or hire a property manager to watch your rental investments, we are fully prepared and equipped to help you accomplish your objectives. Please contact us to learn more!