Before taking the step of buying a home, it wise to find out all the costs associated with homeownership. After all, you want to be able to stay in the home. Creating a monthly budget is the best way to ensure that all your expenses will be taken care of. People often ask what is going to be their mortgage payment, yet they also have to realize there are other costs as well. The numbers are different for every property. However, simply being aware of what to ask throughout the process will help you find the right home for your budget.
As a general rule, you will want to spend no more than 45% of your monthly GROSS (before taxes) income on your monthly payment which includes Mortgage Payment, Property Taxes, Fire Insurance, Home Owner’s Association (if condo or townhome) and Mortgage Insurance (if any).
Mortgage Payment
When you finance your home, you will have a regularly scheduled mortgage payment. This payment includes principal (the amount that was originally borrowed) and interest. It may or may not include property taxes and property insurance. The payment amount will depend on how much money you borrow, the interest rate on the loan, and how much time you have to pay off the loan (Example: 30 years). You can visit here for a mortgage calculator.
Money Saving Tip: You might want to consider making extra payments on your mortgage. This means you will reduce your principal faster, pay the loan off quicker and pay less interest.
Property Taxes
As mentioned above, your Mortgage Payment may or may not include Property Taxes. Whether or not your lender collects for Property Taxes, you will want to include 1/12 of the annual payment in your Monthly Budget. Generally take the purchase price and multiply that by 0.001017 to get the monthly tax payment (for estimating purposes in Los Angeles County).
Common Pitfall: Property taxes do go up over time. Make sure to leave some room available in your budget for this. In California, homeowners are protected by Prop 13.
Homeowners Insurance
You are required to buy a homeowners insurance policy if you get a loan from a mortgage lender. You want to find out if this is going to be included in the Mortgage Payment or not. If it’s not, make sure to factor it into your budget. A typical policy for an average home can cost anywhere from $400.00 to $1,500.00 depending on the size of the home, age and additional coverage.
Private Mortgage Insurance (PMI or MI)
A lender will require a Private Mortgage Insurance Policy if your down payment is less than 20% of the property price. This will protect the lender if you default on the loan.
Utilities
The cost of utilities is different for each property. If you are living in an apartment or in another house don’t assume the cost of utilities in the new home are going to be the same. To be safe, you could ask for a record of utility bills if available. You can also ask how many people were living in the home and account for any differences in family size.
Maintenance
If you live in an apartment, you can call your landlord if you need any repairs. Now, you will be your own landlord! You will be responsible for repairs so you want include maintenance in your budget. Before you purchase your home, pay attention to the home inspection to see if there are any major problems that might come up in the near future (roof, plumbing, electrical, etc). You may want to consider having the seller pay for a home warranty or getting one yourself for the first year of homeownership until you get acquainted with the home.
Tip: It is a good idea to keep a fund of 3 to 6 months of monthly expenses in case you have to make unexpected repairs.
