Budget deliberations to contemplate prior to making a home purchase
So, you are considering making the largest purchase of your life and buying a home. Now what? Unless you are a Silicon Valley multi-millionaire, you had better prepare for expected payments such as the mortgage and property taxes, as well as other reoccurring expenses that may in fact vary greatly month to month.
At the very least, a spreadsheet should be set up with as accurate data as you can input. If monthly bills for things such as electricity and water will vary greatly – as is most assuredly the case in the extreme summer and winter months – use a relatively aggressive average amount to fill in the respective cells for monthly and yearly approximations.
Ultimately, be very honest with yourself and significant others – can we truly afford to live in the new house based on our proposed budget in relation to the amount of income we now have? A big, beautiful home sounds great, but if it will make you “house poor,” then is the transaction really worth an overly painful sacrifice? In the most extreme of scenarios, could you manage to keep the house if large, unforeseen expenses come up?
The following is a short list of financial obligations to consider when purchasing a new home. The list is by no means intended to be all inclusive.
1. Monthly mortgage, taxes and required homeowners insurance payments
The mortgage payment should certainly be the one of the most predictable expenses in your monthly budget. There a multitude of online mortgage calculators that can help you easily estimate the monthly obligation, taking into account the principle and interest repayment amount given the prevailing interest rates. Add that amount to the cost of homeowners insurance (get a quote from your agent – remember, you are required to carry mortgage insurance if you do not have a minimum of 20% equity in the home initially) and the cost of estimated property taxes (normally, somewhere in the neighborhood of 1.25 to 1.5% of the home’s value). It might be a good idea to work with your lender in advance to get a fairly accurate overall and monthly estimate based on your credit worthiness and the amount of money you are currently qualified to borrow. Remember, as the value of the property rises, the cost of insurance and taxes will rise in a lagging manner.
2. Assorted Mello-Roos, other assessment and association fees
Be very thorough to check whether the home you are contemplating making an offer on is in a special Mello-Roos district and/or a school assessment district or subject to both additional fees. Also, if the property is a common-complex residence such as a townhouse or condominium, be sure to add the cost of the required association, maintenance and/or security fees to the same monthly homeowner cost spreadsheet you are putting together. In the case of all of these noted possible fees, make sure to ask your agent for accurate, current amounts.
3. Ongoing and preventative maintenance
Obviously, things break after years of use. Cabinet hinges, door hinges, faucets and garage doors are especially susceptible to continued use. If the home is older, the probability of a repair increases dramatically. The bottom line, add an appropriate amount of preventative and fix-it expense to the growing spreadsheet. Use $100 per month as a starting point, realizing large repair and/or replacement costs can run into the thousands – especially if the required fix-it requires a professional’s skills or tools.
4. Outside yard care
Remember to add a line item to the budget for yard and miscellaneous outside ongoing care. You may want to mow, weed and edge yourself to save money or add a monthly amount to the spreadsheet to cover the estimated cost of a hired lawn care professional. Either way, allocate an appropriate amount, factoring in the cost of replacing sprinkler heads (that may get run over by the lawn mower), plants and shrubs, and any fencing that needs repair or replacement; in the latter case, the cost of replacement will often be substantial. If there is a pool in the backyard, make sure to approximate the required monthly maintenance costs.