Purchasing a home is one of the biggest decisions you can make, both in terms of cost and effect on your lifestyle. Weighing these practical considerations will help you make the right choice when you’re ready to buy a home.
The True Cost of the House
The mortgage is the largest part of the price of a home, but it’s not the full cost. Educate yourself on all the costs associated with buying and maintaining a house to make a well-informed decision about what you can truly afford:
- Mortgage: The rule of thumb is that your principal, interest, tax, and insurance payment (PITI) shouldn’t exceed 28%, or sometimes 30%, of your gross income.
- HOA fees: Many neighborhoods and communities have Homeowners’ Associations (HOA). Depending on the property type and the total services provided, the HOA monthly payment can vary greatly, ranging from $200 to over $500.
- Taxes: Prior to the recent GOP tax overhaul, most property taxes and mortgage interest payments were tax deductions. However, there are now various limits on the amounts and types of deductions, so it’s best to consult a tax advisor or do some homework on your own to assess what, if any, the deductions will be for your situation.
- Basic home maintenance: Every home will need some level of upkeep, items such as clearing gutters, air filters and simple items such as light bulb replacement. A popular estimate is that annual maintenance will cost about 1-3% of your home’s purchase price.
- Appliance replacements: Appliances like dishwashers, laundry machines, and refrigerators have a lifespan of around 9-15 years, so factor replacement timelines into your budget.
- Major repairs: Similarly, your house requires periodic maintenance or replacement of major structures. Unlike a new fridge or water heater, which may cost less than $1,000, a new roof, windows, or HVAC system can cost tens of thousands of dollars.
Be Informed: Don’t skip the home inspection. A thorough property inspection, by a licensed and experienced inspector, will provide a list of most items that need repair. Depending on how in-depth, they could also uncover potential deal-breaking structural or other types of damage such as water. See HUD’s Ten Important Questions to Ask Your Home Inspector.
Figuring out your ideal home size involves a delicate balance between present and future considerations. On one hand, it’s tempting to factor in an extra room if you’re planning on having kids, for example. On the other, you don’t want to strain your budget for a much larger house than you need.
Think in terms of what rooms you’ll use now (a guest room or home office, for example), and repurpose space as needed over time. It can take 5-7 years to begin building equity, so it’s worth imagining your life that far into the future, but you don’t necessarily need to plan much further out than that.
Yes, the old real estate chestnut, “location, location, location,” really does matter. You will likely spend more time in this house than in any other location. Your home location and surrounding area can directly impact your satisfaction.
- How are the nearby schools? Good schools tend to keep nearby home prices competitive. It’s in your best interest to live in a thriving school district, even if you’re proudly child-free.
- How has the value of nearby homes changed over time?
- What are commutes like for you and your partner?
- What’s the state of the neighborhood? Crime reports can provide important clues about general safety and neighborhood health. So can taking a walk, or even reading a local newspaper to learn about upcoming developments or new businesses opening doors.
- How’s the noise level?
- Is the area particularly susceptible to flooding, or downed power grids during storms?
The more you know about what it’s like to live in the area, the better prepared you are to decide if you’ll be happy there.
Think of this as a hyper-focused version of the location consideration. Your house’s position on the lot plays a significant role in what it will feel like to live there.
- Set-back from the property line. The farther back your house is from the curb, the more spacious the overall perspective will feel, and the less likely it is that passers-by or neighbors will have an easy view inside.
- Orientation: Which rooms get the most sunlight? Natural light can affect electricity and heating/cooling costs, as well as the way it looks inside the home.
- Trees and topography: If the house sits on the highest point of the lot, it’s better protected against runoff from heavy rain. Trees can provide privacy and insulation, or become a problem if they grow too large, too close to the house.
While you should factor any debt into the equation when house-shopping, student debt bears special mention. Millennials are the largest home-buying generational demographics, according to the National Association of REALTORS. Of buyers 36 years old and under with student debt, nearly half reported a median loan balance of $25,000. Because options like loan deferment or income-based plans can affect your monthly payment and how a lender calculates your debt for a potential mortgage loan, you may need to take a little extra time to understand the details of your student loan repayment plan.
If you’re a home-buyer with student loan debt, your loans will be calculated into your debt-to-income ratio when lenders determine how much of a loan to approve, even if they’re currently in deferment or forbearance. Out of sight isn’t out of mind, so double-check your debt, even if you’re not currently factoring payments into your monthly budget.
When you prepare an FHA loan application, provide any documentation you have about how much your payments will be. If you don’t have documentation, Fannie Mae guidelines state that the lender may calculate your estimated monthly payment as 1% of your student loan balance. If you’re on an income-based plan and your documentation reflects that your actual monthly payment is $0, the lender can qualify you using that figure.
Remember, just because you’re approved for a loan at a certain amount, that doesn’t always mean this number represents the “right” mortgage for you. Do your own calculations to decide how much you want to be able to save and what a manageable lifestyle costs. Not sure where to begin? Look into pre-purchase coaching or home-buyer education programs. You can talk with knowledgeable professionals who can help you assess your mortgage readiness.