In the past few Making Cents letters, we’ve talked about the cost of owning a home or renting—and understanding how to figure out what you can afford. In our first issue of this series, we talked about debt and savings. And in our second issue, we went over the down payment and the monthly mortgage payment. But besides those, there are still some other important things to think about when it comes to homeownership, and we’ll talk about them today…
The Closing Costs When you’re not buying a home with all cash (which, most of us don’t), typically, there are closing costs put on top of the transaction between you and the seller. Closing costs include the loan origination fee, title search and insurance (what a title company does to make sure no one else can claim ownership to the home you’re about to buy), the appraisal (a third party assessing that the value of the home is at or above the price you and the seller agreed to), and a few other things. Usually, these costs range from 3–6% of the purchase price of the home. Just to stick with our theme, I’ll keep the example I’ve used before. So, for a $260,000 home, 3–6% in closing costs would be $7,800–15,600. It could turn out to be much less than that. In fact, lending company Rocket Mortgage reports that the average closing costs in Florida are about $8,200 including taxes or $4,100 not including taxes. In California, they’re about $6,900 and $5,400, respectively; and in Texas, they’re about $3,800 (same with/without taxes). Now, remember, the larger your down payment, the more equity you have in your home and the less your mortgage payment will be. And you avoid private mortgage insurance if you put down at least 20%. So, 20% is the minimum down payment to shoot for. That would be $52,000 on a $260,000 home. But when you add closing costs into the mix, this means you could be looking at about $15,000 more. The seller could pay all the closing costs, but it’s more likely that both you and the seller will pay the costs. So, be optimistic but realistic at the same time, and prepare to pay closing costs yourself. Many times, lenders will give you the option to add your closing costs to your loan. But be mindful that it could make your payments higher, and it will cost you more money in the long run. Consider if the better alternative would be to look for a cheaper home or to spend the extra time to save up more money. Whatever you decide, don’t force the issue. What’s meant to be will be. If you do the math and a home you really love just seems too expensive (above your means), walk away. You may think you’ll never find a place like it ever again. But chances are, you will.
The Yearly Bundle A few other things to think about are what I like to call the “bundle.” I call it that because they seem to just “pop up” around the same time each year. See, they’re not regular expenses you have every month. So, they’re irregular but always happening. I’m talking about things like home repairs/maintenance, homeowners insurance, property taxes, and association dues. Let me start with dues… Some neighborhoods that are a part of an association assess periodic fees to its residents. Yes, some are monthly. But some are quarterly or even annually. That means, even though technically, your mortgage is $1,050 (taken from the example I used in the last issue), if your quarterly dues are $900, that’s another $300 each month that you’re paying to live under that roof. Speaking of roof… what if there’s a leak? Do you know how much that would cost? Online marketplace HomeAdvisor says most people spend between $375 and $1,700 to repair a leaky roof. What if the AC breaks down? Also according to HomeAdvisor, the average cost to replace it is upwards of $5,500. And then there’s insurance and property taxes… The typical homeowner spends about 2% of their household income on homeowners insurance. And property taxes vary widely. Depending on where you live, you could have a bill that’s $4,500 or one that’s $1,500. The county in which the home is located has information on property taxes online. So, you can visit the property appraiser website for the history. But be careful. If you’re looking at the property taxes of a home you like and the last time it was purchased was back in 2000, the bill you see online will most likely be far less than what yours would be if you were to purchase it now. That’s because property taxes are calculated based on several factors… including the price you bought the home for. So, just because the property tax bill for the current homeowner was $500 last year, it doesn’t mean that’s what it would be for you if you become the homeowner next year. That person probably bought the home at a much cheaper price (that information is on the appraiser website, too). If you really want to know how much your property tax bill would be, there’s no need to try to guess. This calculator is a good place to start. It’s Always Best to Be Prepared I don’t say all this to overwhelm you. I say this to inform you… just so you can prepare. Count the cost. Don’t go into a situation blindly. We’d all rather know what to expect than get taken by surprise. By then, it’s already too late to change our mind. The best thing to do is to save. Save for the possible major home repair. Save for the dues (if you live in an association). Save for the insurance. Save for the property tax bill. That way, when they come up, the money is already there and you have one less thing to stress about. If you know you’d like to set aside $5,500 for any surprise home repair, $1,500 for insurance, and $3,500 for property taxes every year, factor that into your monthly spending. These three costs altogether would be $10,500 a year. Divide that by 12 and you get $875. That means saving $875 a month would be your goal. If it’d help you, create a separate bank account for your “bundle” expenses. Since most banks have a checking and savings account, maybe you’d put this in the savings account. Some banks (including online banks) give you the option to have more than one checking and savings account. So, consider that, too. One thing, though… $10,500 is a lot. Even splitting it into 12 months, or $875, is a lot, in my opinion. So, just remember that a major expense, such as replacing your AC, is probably not going to happen every year. So, don’t panic and think that you have to save $875 a month for the rest of your life. You may not need to. This is what “rainy day” savings is for. And it’s also why it’s very important to make sure you have emergency savings and three to six months’ worth of living expenses before and after you put a down payment on a home… If you want to make a down payment and pay closing costs, don’t use your emergency savings for that. Keep your savings for buying the home and your savings for emergencies and paying bills separate. Doing your best to do this will reduce stress and better prepare you for the costs that come with owning a home. If you’re already a homeowner and don’t have a savings cushion, or you weren’t expecting this year’s property tax bill to be so high, be encouraged by the fact that you can prepare for next year. If you know you need to save a lot but can only save a little… start by just saving what you can. Something is better than nothing. And that goes for whether you’re a homeowner or not. All any of us can do is try… and then turn around and try again the next day. Always remember this. Because we all have to start somewhere.
With gratitude,
Melody C. Kerr, MS
Writer, Editor, Financial Coach
