3. Get an estimate of your closing costs, including points (the dollar amount paid to a lender for obtaining a lower interest rate on a loan—one point is one percent of the loan amount), taxes, recording, inspections, prepaid loan interest, title insurance (a policy that insures a home buyer against errors in the title search; cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller) and financing costs from your mortgage lender or a real estate professional. These will generally add up to between 2 and 7 percent of the property value. You’ll receive an estimate of these costs from your lender after you apply for a mortgage.
4. Add the down payment requirements and the closing costs together to determine the amount of money you’ll need right off the bat. But you’re not done yet.
5. Think about the actual move. Will you hire a moving company or rent a truck? Either way will cost you. The more stuff you have, the more it will cost.
6. Property taxes. Many lenders will require an impound account in which monthly payments for property tax (and often insurance) are paid together with the monthly mortgage payment. You can figure your average annual tax rate will be about 1.5 percent of the purchase price of your home.
7. Next, budget for maintenance and repairs. HouseMaster, a home inspection company with 300 franchises nationwide, said that based on a study that evaluated 2,000 inspection reports, the typical costs of major repairs are:
- Roofing: $1,500 to $5,000
- Electrical systems: $20 to $1,500
- Plumbing systems: $300 to $5,000
- Central cooling: $800 to $2,500
- Central heating: $1,500 to $3,000
- Insulation: $800 to $1,500
- Structural systems: $3,000 to $1,500
- Water seepage: $600 to $5,000
Once you crunch the numbers and find you come up a bit short, investigate ways to reduce or creatively fund your down payment—it can come from a variety of sources. Check with your realtor or lender to find out what’s available.
You’ll also need to factor in the cost of homeowners insurance. In addition to the type of construction, age of the home, your credit history and past insurance history, new issues like litigating costly toxic mold cases are raising homeowners insurance rates.
In fact, the National Association of Insurance Commissioners reports that homeowners will spent an average of $822 on homeowners insurance in 2007, the last year data was available.
In your final analysis of whether you can afford to buy a home, you’ll want to weigh the costs with the financial benefits—a consistent mortgage payment (unlike rent, which can increase), the tax benefits (you can deduct, in most cases, mortgage interest, closing costs, and property taxes), and the all-important appreciation factor—the rate of increase in a home’s value.
And of course, you’ll want to weigh perhaps the biggest benefit of all—having a place to call your own.