Buying a Home is Way More Expensive Than You Think. Can You Really Afford it?

Buying a home is a huge life accomplishment. It symbolizes success, security, and maturity. It can also serve as an important asset that grows in value over time. As the earliest millennials hit their 30s, start climbing the career ladder, and walk down the aisle, a whole new generation is beginning to dream of home ownership. Is homeownership right for you? While in theory, it may seem like your money would be better spent paying down a mortgage instead of disappearing forever into the hands of a landlord each month, many women don’t realize just how expensive buying a home can be.

Here’s a quick tour of all the costs you can expect to face as you start on the home-buying journey. If you can handle all of them, then it’s time to call a real estate agent.

Your Mortgage Is Only the Beginning

Unless you won the lottery or are a stock market genius, chances are that you will need to get a mortgage to buy a home. Let’s assume you qualify for enough money for a down payment a starter home. The first thing you’ll need to ensure is that you can cover the mortgage payment each and every month. Ask yourself – what happens if I lose my job? Will I be able to pay my mortgage for three months until I find a new job? What if it takes six months to find work? Am I buying a home in an area that offers plenty of employment opportunities?

It isn’t uncommon for couples or even good friends to buy a home together. However, not every relationship was meant to last. Ask yourself – will I be able to afford the mortgage if my boyfriend and I break up? What if my best friend has to move away for work?

Down Payment

In order to qualify for a mortgage, you will be expected to come up with a down payment. A typical down payment is 10% to 20% of the home’s cost, though certain programs may allow you to make a 5% down payment or even less.

Do you have enough money in your savings for a down payment? Even if you do, does this represent all of your savings? What happens if you use all of your money for a home down payment and then lose your job, face a medical crisis, or wreck your car? Will you have the financial resources to see you through that crisis?

As a first-time home buyer, you can pull up to $10,000 out of your retirement accounts without a penalty to cover the cost of a down payment, but this move has consequences too. You aren’t just losing $10,000 from your retirement. You’re also paying taxes on the money you withdrew, plus you are losing all the growth that $10,000 would have earned if it spent decades in your retirement account. Assuming 6% growth a year, that $10,000 could have turned into $57,434 in 30 years!

Be aware that the lower your down payment, the higher your interest rate will be on your loan and the higher your monthly mortgage payment will be. If you put down less than 20%, you will also be forced to pay private mortgage insurance (PMI) on a monthly basis. PMI can cost up to 1% of the mortgage amount each year.

Closing Costs

Since you are the buyer, you will not have to pay a commission to your real estate agent. Their commission comes from the home seller. Huzzah! However, you will still be expected to pay closing costs on the transaction. This can be up to 5% of the total cost of the home. If you bought a house for $300,000, for example, your closing costs might be as high as $15,000. Note that this is on top of your down payment.

Moving Costs

Moving is not cheap. You may be able to gather a few faithful friends together and rent a moving truck, but you’ll still have to pay the rental fee, gas, and lots of pizza for your friends. Don’t forget that your time is also valuable. If you have to take a day or two off work to move, that’s money lost. If you hire professional movers, you could be looking at a couple hundred dollars, more if you are moving across state lines.

Furniture and Appliances

Even if you think you already have everything you need for your new home, you don’t. Trust me. You’ll find that you don’t have enough dishes, a carrot grater, or that your wine glasses broke in the move. In all likelihood, your home will be missing major appliances (unless you negotiated with the seller to keep them). You may need to buy a refrigerator, a washer, dryer, microwave, and/or dishwasher.

Many new homeowners also use moving as an opportunity to upgrade their furniture, especially if they are moving into a big house from a small apartment. Does the house have a guest room? You’ll need to buy a mattress, bed, dresser and other bedroom furniture. Finally got your own office? That desk, printer, scanner, and new monitor aren’t free.

Getting new furniture for your home can easily add thousands of dollars to the move.

Changes and Remodeling

Most houses are not entirely move-in ready, and many of them (especially if you got a good deal on it), will need some TLC. That may mean pulling up old carpeting and installing new flooring, updating pipes, switching out cabinets and countertops, changing light fixtures, and even painting inside and out. Heck, maybe you’ll need to put in a new water heater or put on a new roof. Even small remodels and updates can cost thousands, and it’s frighteningly easy to hit five digits. For example, even a basic kitchen remodel will set you back $10K.

You may try to save money on fixing up your new home by doing it yourself. That can definitely save you thousands on labor, but you’ll still have to buy materials. Paint, roof tiles, and fixtures all add up. Also, don’t forget that your time is also valuable.

Homeowner’s Insurance

In order to get a mortgage, you’ll need to purchase homeowner’s insurance. This will help protect the value of your home against fire, burglary, and other potential catastrophes. The cost of homeowner’s insurance varies depending on the value of your home, its location, and what policies are available in your area. According to Zillow, a general estimate is about $35 per month for every $100,000 in home value. On a $300,000 home, that adds up to an extra $105 a month. That might not seem like a lot, but you’ll need to include that in your budget, along with your monthly mortgage payment and other housing costs.

Also, a standard homeowner’s insurance policy doesn’t cover every risk. If you live in a place like California, which experiences numerous earthquakes, you may want to purchase supplementary earthquake insurance. If you live anywhere on the Eastern seaboard, flood insurance is also probably a good idea.

Homeowner’s Association Cost

If you move into a townhome or condominium, you will likely have to pay a homeowner’s association fee, which will cover general upkeep for your complex. This may go toward things such as taking care of a pool, a community center, the landscaping, and signage. This fee isn’t optional, and HOA fees can vary greatly. It may be as low as $100 or as high as $500 a month or more. Here in California, it isn’t unusual to see HOA costs over $300 even in modest complexes. Note: If you purchase a home (not a condo) in a gated community or planned development, you could still be required to pay an HOA fee.

Property Taxes

You know that the tax man wants his piece of just about any financial transaction. Your home is no exception. When you purchase your home, you will be expected to pay property tax twice a year, which will be tied to the value of your home. The cost of this tax will vary depending on where you live. Calculating it is complicated, because the state, your city, even your local school board can affect your tax rate. The average property tax rate in the U.S. is 1.1%, but your rate may be slightly lower or higher depending on where you live. For a $300,000 home, this could add up to $3,300 in tax costs a year. Most banks will allow you to roll property tax costs into your mortgage payment, so you won’t be hit with sudden big bills twice a year.

Utilities

Moving from a small apartment to a big home may increase your utility costs. After all, it will cost a lot more to heat and cool a big home than it will a studio apartment. Also, your rent in your last place may have included some utilities, such as trash pickup. Think about how much you pay for water, electricity, heating, cooling, and trash pickup now. You’ll pay at least that much in your new home and likely more!

Adding It All Up

A simple mortgage calculator will tell you that a $300,000 home with a 20% down payment will cost you $1,135 a month in mortgage costs. That doesn’t sound so bad, right? Heck, you may be paying more in rent for your current apartment!

Don’t let that calculator fool you. Reality is a very, very different thing!

Let’s say that you can only put down 10% on a $300,000 home. Your interest rate will go up, and you’ll have to pay private mortgage insurance. Let’s also assume you are purchasing a condo in a complex with an HOA. Now, let’s see what your monthly bill might actually look like:

  • Mortgage Payment: $1,320 (higher interest rate due to lower down payment)
  • PMI: $250
  • Homeowner’s Insurance: $105
  • HOA: $250
  • Monthly Property Tax: $275
  • Utilities: $225
  • Total: $2,425/mo

That’s more than double what that simple mortgage calculator estimated! Don’t forget about closing costs, which might be $15,000, moving costs, remodeling costs, the cost of new furnishings and appliances, and any time lost from work during your move.

The truth is that it is extremely easy to get in over your head when it comes to buying a house. Maybe you have just enough to make a 10% down payment, but if you don’t have adequate savings; just the act of moving could put you into significant debt that will be nearly impossible to climb out of, especially if your monthly costs are far higher than you anticipated. This is where the term “house poor,” comes from. It refers to someone who spends a majority of their money just to afford their home.

The point of this article is not to scare you away from owning a home, but rather to open your eyes so that you are truly ready for the expenses you will face. Being “house poor” is a financial trap. It makes it nearly impossible for you to save for retirement, build your emergency savings fund, and enjoy a financially secure life. It also significantly increases your chances of defaulting on your mortgage if you should lose your job or face other financial challenges. Oh, and one more thing – it’s stressful! No one likes spending their entire paycheck on bills.

Owning a home can be a great accomplishment, but only when you are ready for it. Make sure you understand the true costs of homeownership before you dive into the housing market. It may be smarter to take an extra six months or a year to save up for a 20% down payment. Another option is to look for a less expensive house. Just because you can qualify for a mortgage of a certain amount doesn’t mean you have to use it all!

Need help saving for a down payment on your first home? Consider starting a Money Club in your area (anyone can start a club!).

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