6 Important Considerations Before You Take on a Mortgage
When you compare a monthly mortgage payment to your rent, homeownership may seem surprisingly affordable. Why wouldn’t you buy a house for $700 a month instead of paying $1,200 a month in rent?
The mortgage payment is not the only expense associated with homeownership. There are a few “hidden” costs you need to consider when determining if you’re ready to buy a home.
1. Furnishings
If you’ve been renting an apartment, you might have some furniture, but not enough to fill an entire house. If you buy secondhand or from a less-expensive retailer, it can still add up, so you need to account for that cost when budgeting.
2. HOA Fees
If you buy a house in a community overseen by a homeowners association, or HOA, you will owe annual or monthly dues. The HOA generally takes care of shared property and amenities, such as a community park, pool, sidewalks, and sometimes home exteriors. HOA fees vary widely, but paying $200-$300 a month is not uncommon.
3. Homeowners Insurance
Homeowners insurance is required if you buy a home with a mortgage. Basically, this insurance policy will pay for any damage that occurs to your property due to natural causes or accidents. It will also pay medical bills if someone is injured on your property, which happens more than you might think.
Homeowners insurance premiums are based on the value of your home, how secure it is, and other factors. You can expect to pay $1,000/year or more for this coverage.
4. Private Mortgage Insurance
If you have less than 20% of the home’s cost saved as a down payment, the bank will often require you pay for private mortgage insurance (PMI). Basically, this is an insurance policy that will pay the bank if you stop paying your mortgage. PMI is usually about $100/month, but it’s still a cost you should consider when budgeting to buy a home.
5. Property Taxes
When you own property, you have to pay property taxes. In many cases, property taxes can be as much, if not more, than your mortgage payment each month. Tax rates can vary widely between towns and cities — even those in close proximity. Always research the property tax rate in a municipality before you decide to buy a home there. If the taxes are $6,000/year on a home, then you’ll need to add $500/month to your monthly mortgage payment for a more realistic idea of what living in that home will actually cost.
6. Repairs
Most first-time homebuyers do not purchase brand-new homes. Even if you buy a new home, there’s always a chance something will break. You need to set aside money for an emergency fund so if the hot water heater, furnace, stove, or other appliances break, you can afford the repairs. (It’s not as simple as calling the landlord when you own the home.)
When deciding whether or not you can afford to buy a home, don’t compare the monthly mortgage payment alone to rent. You must also consider HOA fees, taxes, insurance fees, PMI, and the cost of furniture and repairs. Homeownership has financial benefits, but it’s important not to buy until you are financially prepared.
Equal Housing Lender