When starting out looking for a home your lender will give information on what your payment might look like. But what does that payment include? When renting most people write one check and that’s it – it covers everything. Lets take a look at what the true breakdown of homeownership.
What is it, really?? It’s the payment at the interest rate on the note you signed to get your money to buy the house. It includes principal and interest. However, in most cases your lender will require your payment to include your real estate taxes and homeowners (or sometimes they call it hazard) Insurance.
Real Estate Taxes
Depending on where you live you will pay taxes on the assessed value of your property and typically this is done at the county level. Why does a lender typically require you to pay in your monthly payment? Well if for some reason you decide you don’t want to pay, the local government can take action, attach liens and this can be adverse to the lenders interest in the property until you have paid off your loan.
Homeowners (Hazard) Insurance
This is quite simple. You need insurance to protect not only the actual house but the contents. If there is a fire or other event it will help you rebuild (floods are different). This is one area where skimping is not advised. It’s a piece of mind and although some lenders require a minimum, it’s good to speak with an insurance professional and make sure your coverage fits your needs and requirements.
This will depend on the loan program you have chosen, but if you are putting less than a 20% down payment the amount of Mortgage Insurance Premium may vary. This insurance is to protect the lender (not you as the homeowner) in cases of default. Most will allow it to be removed after a certain time period and/or once the equity is greater than 20%. However, important to note is an FHA loan. They require an upfront premium and an amount each year (broken into monthly payments) for the life of the loan. You’ll want to talk to you mortgage professional as often there are other programs that will allow for higher interest rates for a reduced or no mortgage insurance premium.
So those were the items you sort of probably knew about, now lets talk about the forgotten.
If you are moving from a one bedroom apartment to a three bedroom house, guess what, you’ll probably be paying more for your energy needs. In some cases the seller can give you an estimate of their monthly bills and sometimes the utility company can get you some figures. Be especially cautious of oil heat as this cost can be more than other types of heating options. Keep an eye out for energy efficient features such as newer windows, energy efficient heating systems and LEED rated green homes.
Have a leak in your toilet? No – you can’t just call the "super" to come fix it. Either you’ll be planted in front of YouTube watching plumbing tutorials or you’ll be calling someone to fix it. Being able to do some things yourself will save your budget so strap on a tool belt and give it a try, if you are at all handy. And if not, open your wallet. Then you’ll also have yard maintenance, painting, roof and the list goes on. However, don’t be alarmed, you’ve done an inspection, so you should be aware of items and can plan for them. But with any house, things happen and things break. Depending on your budget and condition of home, you’ll want to put a minimum of .5% each year of the house value (on a $300,000 house that’s about $125/month) into a maintenance account. Think you are off the hook buying a condo; nope you'll be paying a monthly HOA fee which typically includes an amount for maintenance. Some people opt for a home warranty. These plans can help protect you from unexpected expenses. However, not all plans are the same - we can help you find a plan that works for you!
There are a lot of costs associated with homeownership so it's good to be prepared!