If you rent an apartment, chances are your monthly payment is all inclusive. Your monthly payment likely includes any repairs made to the property, taxes and maybe even some of your utilities. If your fridge gives out, you’re only saddled with the responsibility of re-stocking the freezer, not shelling out the $600 it could cost to replace it.
While current market conditions (historically-low mortgage rates and cheap real estate) have led to increased levels of affordability (lower monthly payments), there are additional homebuying costs to consider beyond just your monthly payment. First-time homebuyers need to be aware of the added costs that come with owning a home.
How Much Can You Afford?
Before worrying about replacing the water heater or the windows in the upstairs bedrooms, first you need to establish a price range for homes you can buy. A great way to estimate your price range is to utilize HSH.com’s “How Much House Can You Afford?” calculator. This calculator can give you an accurate sense of how much home you can buy in seconds. The calculator is simple and easy to use — just fill in the seven required fields and hit the “Click Here to Calculate” button. The calculator’s results also take mortgage insurance (MI) into account when determining your price range. Why is this important? MI protects the lender against losses if you happen to default on the loan.
Mortgage Insurance
The housing crisis has caused mortgage lenders to be a lot more selective in terms of who they lend money to. Nowadays, a mortgage lender will require any borrower who makes a downpayment that is less than 20% of the home’s value to purchase MI. How much will MI add to my monthly payment? The cost of your MI policy is determined by the type and term of your loan and the downpayment you make.
Maintenance Costs
Expect the unexpected when it comes to home repairs and maintenance. Home appliances tend to break at the most inopportune times. The only thing worse than dealing with an unexpected repair is not having the money to fix it. Budgeting for home repairs before they are needed is a simple way to make sure you’re always prepared.
The experts say borrowers should allocate at least one percent of their home’s total value each year for maintenance costs. Some experts even suggest budgeting up to four percent of your home’s value. Homeowners should take the age and overall condition of their home into account when deciding how much to set aside for maintenance costs. If your home costs $200,000, that means saving an extra $2,000-$8,000 each year just for repairs and overall maintenance.
Ask the Seller for Assistance
Especially in today’s real estate market -- where some buyers may be eager to sell their homes – buyers have some added leverage. You can use this leverage to help defray some of the costs of homeownership. For example, if your home loan is insured by the Federal Housing Administration (FHA), the FHA allows the seller to essentially pay the buyer a sum of up to 3% of the loan’s value. Homebuyers can use the seller’s concessions to help pay their closing costs or any other expenses.
A seller can also help ease some of the financial apprehension a buyer may have in this unstable market by offering them “insurance policies” such as a home warranty or mortgage protection. As we mentioned before, if you are coming from a rental property, chances are you never had to budget for home repairs. A home warranty -- a service contract designed to protect your funds against commonly-occurring home repairs and replacements -- can be purchased by either the homebuyer or the seller. Sellers often purchase home warranties as a way to entice buyers.
According to American Home Shield, a home warranty company, everything in your home is not covered under home warranty contracts, “however, most of the system components and appliances that breakdown frequently are covered.”
Note: Many local utility companies offer their own contracts and/or cost-protection plans for appliance repairs.
Part of what has made the current real estate market such a turbulent one is the fact that employment is scarce and unreliable. Just as many of the major car companies are doing, some sellers are offering to buy insurance for buyer so they can continue to pay their mortgage if they happen to lose their job.
Knowing What to Expect
Being prepared when it comes time to purchase a home – knowing the extra costs that are associated with homeownership and how to budget for them – will ensure that your homebuying experience is a fulfilling one.
