“Can I afford a home?” may seem like an overwhelming question, but really, there are just two major types of expenses you have to consider: upfront and ongoing costs. Here’s a breakdown of each, so you can figure out how much you’ll need — and if you’re ready to get going.
Down paymentYour down payment helps prove to your lender that you can afford a home. In the past, most advisors have recommended that you put down 20 percent to get the best loan terms. But these days, most first-time buyers put down less than 10 percent. And with mortgages like FHA, USDA, or VA, you can put down as little as 3.5 or even 0 percent. That info alone can make “Can I afford a home,” so much easier to answer. If you put down less than 20 percent, your lender will often require private mortgage insurance (PMI). It can cost from 0.2 percent to 1.5 percent of your loan. However, it disappears after you’ve paid off 22 percent of your home. You can pay it all with your home closing costs, or roll it into your mortgage payment.
Inspections and appraisalsA home appraisal estimates the true value of the home so your lender knows they’re not financing it for more than it’s worth. A home inspection helps you make an informed purchase: Any issues (and most homes have some) will appear on your inspection report, so you’ll know what to expect. After your offer is accepted, and before you close, you’ll have an inspection and appraisal on the house. A basic home inspection costs around $300 to $500, and you can expect to pay $300-$400 for an appraisal.
Closing costsClosing costs range from 2 to 5 percent of the total cost of the home, and they’re due when you close on your mortgage. You might be wondering what these costs entail. Closing costs vary by loan, but they typically include:
- Title Insurance: Insurance that protects the home buyer in case the seller doesn’t have full rights or access to the title of the property
- Origination Fee: A loan processing fee charged by the lender
- Underwriting Fee: Covers the cost of evaluating and verifying your loan application
- Document Preparation Fee: Pays for your loan file to be prepped
- Credit Report Costs: The fee to pull your credit score and report.
- Property Taxes: Prorated property taxes from your closing date through the end of the tax year.
- Homeowners Insurance: Typically, your first yearly premium.
- Prepaid Loan Interest: The cost of interest you’ll owe up until the first payment is due on the home loan.
Principal and interestYour principal is the amount of your home you’re paying off each month, and your interest is added to that in your mortgage payment. Exactly how depends on your mortgage type. With a fixed-rate mortgage, this amount will stay the same for the life of the loan, but the amount of principal versus interest will change over time.
InsuranceHomeowner’s insurance protects your property in case of loss or damage. Rates vary widely by where you live (state averages for annual premiums range from $500 to $2,000) and by coverage, so you’ll want to shop around to find the best deal.
Property taxesStates and cities have their own property tax laws and rates, so check with the local government to find out the rate on a potential home. Multiply the assessed value of your home by the tax rate to get an estimate on your future payment.
Private mortgage insuranceAs noted above, if you put less than 20 percent down, you’ll likely need to pay 0.2 percent to 1.5 percent of your loan in PMI as a part of your monthly mortgage payment — at least until you have enough equity in your home, or until you refinance.
Homeowners association feesDepending on where you live, you may have to pay HOA fees each month. These are neighborhood organizations, and your fee covers anything from community pool maintenance to snow shoveling or mailbox painting. They vary quite a bit by location, but the average HOA fee is around $200-$300 per month.
Home maintenance costsA brand-new, move-in-ready, built-to-order home is going to cost a lot less to keep up than a century-old foreclosure — but still, all houses require maintenance. On average, expect to spend around 1 percent of the cost of your home in maintenance each year — and more if it’s a fixer-upper.
Property maintenanceThis’ll vary, too. If you have a green thumb, a ladder, and spare time, you might only need to budget for materials. Or you may want to leave it all to the pros. For each home you consider, you’ll want to eyeball the property and get an estimate for maintenance services or for the tools you’d need for a DIY home project.
If you’ve calculated the above and feel you’re ready to buy a home, now see how much home you can afford.