Budgeting for the Costs of Homeownership
When buyers look through the multiple listing service (MLS) database of homes for sale, it can be easy to become focused on the listing price of the home and to then use that number to determine if the home fits the buying budget. But doing this can have serious consequences, especially if no other costs of ownership are figured into the equation.
Purchasing a truly affordable home will be a process in which all the costs involved in living in it are considered before any offer is made. Buyers who are currently shopping for a home or will be doing so soon should consider the following information before making an offer on a home.
Calculate Net Income
One way to make homeownership more affordable is to opt to use net or after tax income figures, instead of gross or pre-tax amounts when calculating your budget. Since withholding taxes typically take about 15 percent off the top of each paycheck, planning your housing budget based on the net amount left after taxes is more realistic and easier for most people. For example, a household earning $4,000 per month may be only netting about $3,400. Basing total housing expenses on the lower number, instead of the higher one, helps ensure that their total housing costs will be more easily affordable than they would if based on the higher number.
Determine a Total Monthly Bill
Another problem that buyers run into when trying to budget for housing is forgetting to include all the costs of living in the home and then using that figure to come up with their most affordable monthly housing budget. Total monthly costs of living in the home often include:
- the monthly principle and interest payment on the home
- the annual property tax payment, divided by 12 to get the monthly figure
- the annual homeowners insurance premium (if applicable), again divided by 12 months to get the monthly figure
- the average monthly utility costs, based on one full calendar year of estimated costs
- any other fixed monthly expenses associated with living in the home, including water, sewer, Internet, cable television, gas service, and security
- any additional costs, such as estimated annual HOA dues and, depending on the age of the home, annual costs of repairs or maintenance should also be divided by 12 to get an average monthly figure
Once all costs are computed to find the most accurate estimated monthly cost of living in the home, the buyers will be able to much more accurately decide on a comfortable housing budget number for their specific situation.
Sourcing the Information to Compute Total Costs of Living in the Home
When working to compute these numbers, buyers should know that real estate tax information may be listed in the MLS or is always available from the county government where the home is located. Many utility providers now offer average rate or usage information for most of the homes in their customer base. Much of this information can be sourced online, through the utility company that services the home or by asking the buyer's real estate professional to obtain it.
For more advice on purchasing a truly affordable home, buyers should discuss their situation with their real estate professional. They can help their clients reduce their overall home ownership costs by screening out homes that may be too costly to repair and maintain and focusing the search, instead, on homes that offer more affordable costs each month.