Great news! You found your dream home, and it appears to be within your budget. But before you sign on the dotted line and finalize your purchase, it’s important to consider all of the other factors that could potentially affect your home’s affordability. After all, the list price isn’t the final amount you’ll pay. Your mortgage rate, insurance costs, inspection fees, and many other factors can all work to significantly increase how much you will pay for your home over time.
Below, we take a closer look at the most common home-related expenses (outside of the list price) that you should factor into your budget when you’re seriously considering buying a home.
Factors that can affect the cost of owning a home
Your mortgage rate
The interest rate charged by your mortgage lender is among the most important factors influencing whether or not you can afford a particular home. Taking steps to ensure you’re getting the lowest interest rate possible can make a big difference in the kind of house you can buy. After all, even a 1 percent difference in rates can translate into you paying hundreds or thousands of dollars more each month just in interest costs.
For example, if you make a 20 percent down payment on a house with a $200,000 list price (40,000), that leaves you with a $160,000 mortgage. If you finance that over 30 years at 6 percent, your monthly payment would be approximately $959. Going up just one percentage point would increase your monthly payment to $1,064. That’s $105 more per month, or $1,260 more per year.
How do you qualify for lower rates? Make sure that you’re shopping around, as rates can vary significantly from lender to lender. Beyond this, taking steps to increase your credit score and decrease your debt-to-income ratio can also help you qualify for lower rates.
Mortgage points are an optional fee that you can choose to pay your mortgage lender in exchange for a lower interest rate. Each point will typically cost you 1 percent of your total loan amount. While terms vary from lender to lender, a point will usually translate into a .25 percent reduction in your interest rate.
While you’re not required to pay mortgage points, they can be an effective way of lowering your overall interest costs. But they also increase your closing costs, so you’ll need to factor that cost into your budget.
Private mortgage insurance
Private mortgage insurance (PMI) is a special type of insurance that many mortgage lenders require you to carry if you choose to purchase a home with a down payment that is lower than 20 percent of your home’s purchase price.
PMI lowers the risk to the lender in the event that you were to default on your mortgage — but it also increases your monthly mortgage costs. In most cases, PMI will be calculated as a percentage of your loan amount; usually, between 0.5 and 1 percent. This can add hundreds of dollars a year or more to your mortgage payment.
Property taxes can vary widely depending on where you live. The World Population Review estimates that the average American household pays about $2,375 in property taxes each year.
In most cases, property taxes are collected annually. But often when you pay your mortgage, your lender will include an additional monthly payment that’s deposited into an escrow account. This money is intended to pay your annual taxes. Whether you save through escrow or not, it’s a good idea to set an amount aside for taxes each month as this can be a large yearly bill.
Having a home inspected before you make an offer is a smart way to avoid costly problems down the road. Many lenders also require an inspection as a condition of the loan.
A home inspector will look at the home from top to bottom, providing a detailed condition report. Depending on the size of the structure, an inspection can range from around $300 to $500, according to Home Advisor.
Based on the home’s location, a radon test or mold test may also be required. Radon testing runs for between $145 and $700, and mold testing can be from $300 to $1,000 depending on a number of factors.
If a bank is lending you the money to buy the home, you’ll typically be required to insure it. And even if you’re not borrowing, having homeowner’s insurance is still highly recommended, as it can protect your investment from a variety of threats.
Many variables can impact the cost of homeowner’s insurance, so it’s wise to consult carriers in your region who can provide an accurate estimate. Living in a floodplain, hurricane- or tornado-prone area, or a region known for earthquakes can all require you to carry additional kinds of coverage known as riders or supplemental policies. Any riders or supplemental coverage you purchase will also increase your bill.
Givens and surprises
As most new homeowners quickly learn, new costs can creep in even after the home is purchased. Appliances and furniture can add thousands of dollars in expenses. Renovations and landscaping can also add tens of thousands to your bottom line, as well as unexpected costs, like a garage door that breaks down or a furnace that gives up in the middle of winter.
It’s a good idea to budget a monthly amount to save for planned upgrades and another amount for unplanned ones. As a general rule, many experts recommend that you plan to spend approximately $1 per square foot of your home (or about 1 percent of your home’s value) each year on maintenance.
The bottom line
As you begin to budget for and eventually purchase a home, it’s important to factor in all of the other costs that might influence your monthly budget. Knowing that you’ve considered all the costs can give you confidence that you’re ready to make such a large purchase. A financial advisor can also assist you by looking at your broader financial picture and help ensure that you’re taking the right steps to meet your goals (like buying a home) today and in the future.