Costs of Home Ownership
Calculating Affordability
Before deciding to buy a home, calculate your total monthly income and expenses. While
there is no fixed rule which can determine how much an individual or family can pay for
total monthly housing expenses, the main thing is to make sure that the monthly cost of
home ownership won't strain your budget and still allow you to save money.
Compare the new total housing expenses you will have to pay against what you are currently
paying for rent or for the house you now own. If the new home you plan to buy or build
will increase the monthly expense above what you are now paying, be certain that you can
pay the increased costs while retaining some savings. Calculating the net cost of ownership
with your tax advisor in advance is highly recommended, because the net cost to you after
tax credits is also important to consider as a benefit.
If you're not sure that you can handle the costs involved based on your present and
anticipated income, you should postpone buying a home until you are sure you can afford
the total monthly cost, or purchase a less expensive home which you're certain you can
afford.
The Mortgage Loan — Closing Costs
The term "closing costs" generally refers to all charges paid for obtaining
the mortgage loan and transfer of ownership.
Closing costs may include all or some of the following:
- Your Down-Payment, if required
- Discount Point(s) (a percentage of the loan amount you pay to reduce the interest
rate on your new loan)
- Credit Reporting Fee
- Appraisal Fee
- Lender's Underwriting Fee
- Broker's Fee (point(s) paid to broker)
- Processing Fee
- Escrow Fee
- Title Insurance
- Notary Fee
- Recording Fee
- Documentary Transfer Tax Fee and Tax Service
- Pest Inspection (if required)
Certain other costs, technically referred to as "prepaid items," are also
paid at closing. Among such costs are:
- Prepaid Interest on the new loan (prorated daily through close of escrow)
- Prepaid Taxes (required for an "impound" account, or if due)
- Prepaid Hazard Insurance (homeowners insurance policy)
- Prepaid Mortgage Insurance Premium (if applicable)
Note: Having an Impound Account means that your monthly mortgage payment includes taxes
and insurance in addition to principal and interest. Some loan programs may require impounds,
others let you choose to pay your taxes and insurance separately if you so choose.
It's also worth noting that 100% financing programs cover the cost of the loan only
— you will still need to have some cash to pay closing costs unless the seller has
agreed in writing to include all or part of the non-recurring (one-time) costs. Loan programs
that exceed 100% financing, such as 103%, 104% and 107% financing can cover the cost of
the loan plus some or all of the non-recurring closing costs by the lender. A seller can
also elect to carry a Second Trust Deed (second mortgage) for a significant amount if the
borrower cannot qualify for more than a certain percentage of the purchase price, and lacks
the cash necessary to pay the combined difference and closing costs. The interest rate
on a seller-carried 2nd mortgage is determined by the seller, and the seller also reserves
the right in most cases to sell the note to another lender after close of escrow.
Ongoing and Future Costs of Homeownership
- Mortgage Payments. You will be required to make monthly payments to cover interest
and principal on the mortgage. This is the biggest item of monthly expense but is not the
only one.
- Taxes and Insurance. You will also have to pay future real estate
taxes and assessments, and for insurance on the property (that is, insurance that will
pay for losses due to fire or other hazards). If you have an impound account, an amount
to cover real estate taxes and insurance will be added to the monthly payment you make
to the lender. You should bear in mind that your monthly payment may later be increased
if real estate taxes or insurance costs rise. A loan broker can estimate what the taxes
and basic insurance will be in advance, and these amounts are disclosed in a Good Faith
Estimate.
- Utilities and Trash Collection. You will need to pay the utility
bills and for trash collection. Utility bills for electricity, water, gas, and the like
will vary, depending on the extent to which your household uses them. In figuring whether
you can afford to pay the expenses on the home you propose to buy, be sure to make adequate
allowance for these items. Also, don't forget to figure in utility costs for an in-ground
swimming pool or heated spa.
- Maintenance. Remember that, like everything else, your house
will require maintenance and repairs as it ages. If your home is newer and well-built,
these expenses should not be too large during the first two or three years, but may rise
as your property gets older. You may also want to inquire with your homeowner's insurance
company about additional insurance packages that cover the cost of repairs or replacement
on many major household items that aren't normally covered under your standard homeowner's
policy.
- HOA & Mello Roos.
Homeowners Association and/or Mello Roos fees are an added expense for ownership in certain
residential areas and condominium and townhome developments.
- Other Debts. If you already have other debts such as credit
cards or automobile payments, or if you buy things for your home on credit, be sure you
can afford to make these payments in addition to the other costs discussed above. Some
homeowners run into serious trouble because they burden themselves with too much unsecured,
revolving debt, which can lead to poor credit, default, bankruptcy or even foreclosure.
As always, feel free to call or email me with any questions
you may have.
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