DO YOU WONDER IF YOU CAN REALLY afford that beautiful home you fell in love with? The real cost of home ownership is more than a mortgage payment. The benefits of home ownership are plentiful, from a tax deduction to having a place to call your own. However, many factors should be considered in the real cost of a home.
A lot of first time home buyers assume that the only cost of a home is the mortgage, not realizing what else is involved in a monthly payment. A mortgage payment will often times consist of the principal and interest, along with the property taxes and property insurance. Many first time home-buyers forget to include the cost of property taxes and property insurance when figuring out what they can afford. For example, if you had a monthly mortgage budget of $3,500, you would be able to afford a loan of approximately $615,000 on a 30-year fixed loan at 5.50 percent if you did not have to consider any thing else. If the $615,000 represented a 95 percent loan to value ratio, the purchase price would be $647,368. However, property taxes and insurance need to be used when calculating what can be afforded.
In the above example, backing into the numbers, using property taxes and insurance, you would be able to afford a property costing approximately $526,315. Here is how the numbers breakdown: On a $526,315 purchase price, a 95 percent loan to value would equal $500,000. If you took a 30-year fixed loan at 5.50 percent, the principal and interest payments on $500,000 would come to $2,839. At a tax rate of 1.20 percent based on the $526,315 purchase price, the property taxes come to $6,316 annually or $526 a month. Once you add in property insurance of $1,600 a year or $133 a month, the total payment comes to $3,498. The difference between $647,368 and $526,315 is over $100,000, which is significant to many first time homebuyers. That is why it is important to know what you can really afford before looking at properties outside of your budget.
Lenders, such as banks, take the property taxes and property insurance into consideration before qualifying someone for a loan. However, there are other actual expenses that should be calculated as well. If you are purchasing a condo, you will have monthly condo fees, such as home owners association or HOA fees, which will run anywhere from $150 to $850, with the majority running between $300 and $500 a year. A bank will include these condo fees in the mortgage payment. In the above example, if condo fees ran $350 a month the loan would be reduced by approximately $60,000, which would reduce your purchase price to about $460,000. Of course, the condo fees take care of the maintenance on the property. However, if you own a house, you will have to pay for upkeep.
Most home owners do not have the time to mow the grass, paint the property or clean the house. All of these tasks cost money. Hiring a gardener and housekeeper is a recurring expense that can add up. Unless you own a brand new home, things are going to go wrong — plumbing, electrical or a new roof can end up costing thousands of dollars. These are items to think about before purchasing a property.
When doing a budget before purchasing a new home, keep real costs in mind. The last thing you want to do is spend time and money constantly working on your property, unless that was your plan. Owning a property you can afford is a great decision to make and there is nothing like calling a place home, just remember to keep the real expenses in mind.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on February 6, 2008. Read the original PDF.