How much you can afford on a home goes beyond the mortgage payment. Factor in the extra costs to keep the home long term and reap the tremendous financial benefits of homeownership.
The perfect little Cape Cod house with a white fence and beautiful landscaping went up for sale on the road you travel every day to work. You can see yourself living there with its quaint ambience and amazing curb appeal.
You have convinced yourself that this is the home you want to put a down payment on and move right in. But first, you need to evaluate whether you can afford it and not leave yourself overextended. Mortgage experts call that house poor.
Figure out why you want to own a home and if you can actually afford it and still live the way you want to – like actually going out to eat once in a while and filling up your car with gasoline. Seriously. Some people go overboard and buy too expensive of a house and then figure out when it’s too late that all those other costs of owning a home is draining their pocketbooks, patience, and joy of being a homeowner.
The cost of ownership isn’t just about paying the mortgage. It’s about affording property insurance and taxes, buying a snow blower and a lawn mower, paying for all the utilities, replacing a broken dishwasher and just being able to keep up with a hundred other things that can cost a lot.
“Affordability has to come into question when you are figuring out if you can afford to buy a house,” says Daniel Ellis, executive director of Neighborhood Housing Services in Baltimore. “Sometimes, it’s about living expenses. Sometimes, it is about discretionary spending. A lot of people haven’t learned to live within their means. We counsel them if they have a lot of credit card debt.”
If you are one of those Americans that on average carry about $15,000 in credit card debt based on Federal Reserves’ statistics, it’s time to start paying it off, he says.
“It’s a huge problem. It does impact your ability to buy. You also will get less house to buy,” Ellis says.
He suggests getting prequalified for a mortgage, even if you don’t actually go through with buying a house at that time. It will give you some idea if you could even get a loan and what you can afford when it comes to buying a house. It is designed to see your situation, income and debt.
“It used to be that you could buy a home three times of what your income was. But you have to look at every situation differently,” he says.
Homeownership is still a great investment. According to Harvard University’s Joint Center for Housing Studies, the rate of return on a housing investment dramatically increases the longer it is held. For example, if someone made a 10 percent down payment, he will get a 94 percent return on that money by just owning the own for three years. After a five-year ownership, the rate of return from just that down payment goes up to 225 percent, and then with 10 years, it jumps to 623 percent. That’s a lot higher than any stock or bond could do.
But you still have to be able to afford that home and keep affording it even if your income drops a little, you have unplanned medical expenses or you have to purchase another car because yours broke down.
“Being prepared for the unforeseen is just part of life,” says Shelly Netherlin-Spivak, senior loan officer at the Arizona Bank & Trust, Phoenix. “If you think of a house and relate it to car maintenance, then it’s easier to understand. If your car needs tires, you are responsible to buy them and put them on. If your home needs painted, then you are responsible for that.”
She suggests that homeowners buy a home warranty to help with those added expenses of a broken refrigerator, roof and other big ticket items.
“We always talk to our clients about home warranties. You can pay $200 to $1,000 up front when you buy the house, and then you can renew it every year. All you pay for is a service call if there is an issue,” she says.
For instance, she had one client have the central air conditioning unit break. It would have cost $8,000 to replace, but the warranty only cost her a service call.
Most real estate professionals will sit down with potential homebuyers to talk with them upfront about all the costs that are entailed in buying a home including any home association or condominium or maintenance fees, insurances, taxes and more.
“If someone has been renting for a long time, it’s hard to understand sometimes how many more expenses they will have – including all their utilities going up,” Netherlin-Spivak says. “You also have to buy groceries, gasoline and car insurance and have a life.”
She emphasizes to her clients that it is important to keep a nest egg. She had one couple come in with $50,000 for their down payment. But she talked with them about their options.
“If they put only $40,000 down and just added in $10,000 to their overall loan, it would cost them maybe an extra $100 a month in the mortgage, but they would still have some savings ($10,000) in case something happened,” she says. “You don’t want to leave yourself with nothing in your bank account in case something happens.”