Can You Afford a New Home?
Buying a new home is one of the biggest costs a person can take on over the course of his or her life. Perhaps you’re longing to make the leap and become a homeowner for the very first time. Or maybe you’ve been in your current home for a while or are tempted by the additional space or new layout a new home can bring. But before you take the plunge and decide to start seriously searching for a new place, you’ll want to consider the many financial facets of this decision.
The Monthly Costs
Deciding to buy a new home means taking on some significant costs. Most of us know to consider how much of a monthly mortgage payment we can afford, but many people fail to consider the numerous other monthly costs that go into a new home. Along with the mortgage, you’ll need to budget for costs such as insurance, utilities and property taxes. Below we’ve gone into details on the different monthly costs you may face and should take into account when deciding whether you can afford a new home.
Insurance
Having a good homeowners’ insurance plan is essential, and not something you’ll want to skimp on. According to Zillow, you can expect to pay about $35 each month for every $100,000 in your home’s value. Your insurance plan will protect you from fires, floods, crime and more.
Another possible insurance cost is private mortgage insurance. An FHA loan is a government backed mortgage insured by the Federal Housing Administration. With these loans you may qualify for a down payment as low as 3.5% of the home’s cost, depending on the strength of your credit score. However, FHA loans require you to pay two mortgage insurance premiums: one paid up front as part of your closing costs, and another premium added to each monthly payment. You have the option of rolling the upfront fee into your overall mortgage rather than paying it at the get-go, but doing this will increase the overall cost of your loan.
Property taxes
Once you’ve bought a new home, you’ll be obligated to pay property taxes to your federal, state and local governments. According to the U.S. Census Bureau, the average American household spends about $2,127 each year on property taxes, but depending on your location and the assessed value of your home, you could end up paying more. If you plan on making home improvements or additions post-purchase, keep in mind that these will likely raise your property taxes.
Utilities
The cost of electric, gas, water and other utilities can be higher than you think and overlooking these can blow a hole in your budget. According to a 2017 study, utilities can add an additional 25 percent on top of homeowners’ monthly housing costs! While newer homes tend to have more energy-efficient features, this can also make them more expensive. While doing your initial research on homes in your area, ask the real estate agent or sellers what they paid for utilities monthly and yearly.
Condition of the Home
If you’re drawn to older homes, keep in mind that they may need some TLC after you move in. Anything beyond small, cosmetic touch-ups will likely cost you some serious money. If you’re interested in a home that needs work, you’ll need to hire a home inspector and a licensed general contractor to give you a cost estimate of any projects it needs. You’ll also want to consider the interest on loans you may take out to pay for the work, extra expenses if you’ll be doing large renovations that will take parts of your home out of commission (for example, if you need to redo the kitchen you’ll likely be spending more money on takeout food) and unexpected expenses due to project delays or other snags.
HOA fees
If you’re eyeing a condo, townhouse or home in a gated community, you will likely be obligated to join the community’s homeowners association, which will charge monthly or yearly fees for the general upkeep of the community and shared spaces. These fees can range from $200 to $400 per month; upscale communities with more amenities tend to charge higher fees. Additionally, if the community needs money for a project – say, repaving streets after a decade or so – the association may charge an extra assessment that can end up costing thousands of dollars.
The Down Payment
It’s important to take a good, honest look at the state of your savings when considering buying a new home. Often, you’ll need a 20% down payment before lenders will be willing to grant you a mortgage. If you don’t have that on hand, it’s possible to get a loan – but you may have to pay pricey private mortgage insurance (a.k.a. PMI) each month which can increase your home costs in the long run.
When considering buying a new home, there are a lot of angles you’ll need to examine before deciding whether or not it’s realistically in your budget. Closely analyzing your income, current expenses, and the expected costs listed above will give you the best picture of whether you can truly afford the investment and prepare you to handle the costs involved with this exciting new possibility.
