Whether you’re a first time homebuyer or looking for a second home, you need a firm idea of what you can afford. Knowing what you can expect financially is especially important for first-time buyers. So let’s discuss some of the things you should consider when planning your next home purchase.
Mortgage Costs
Most buyers require a mortgage (no, you’re not alone!). Get in contact with a reliable lender or loan officer, and work together to pinpoint your monthly payment and the costs of your mortgage. Your mortgage costs can vary significantly depending on your loan type and interest rate.
One of the many benefits of owning, as compared to renting, is the fact that you are allowed to deduct your mortage interest from your taxes. Points that you paid when you purchased the house (or those that you convinced the seller to pay for you) are also deductable from your tax bill.
Insurance
- Homeowners’ Insurance
You’ll need to insure the value of the home against fire, theft, flood and more. I recommend shopping around for the best price. And believe me, if something happens you’ll be glad that you have insurance :). - Private Mortgage Insurance (PMI)
If you put down less than 20% on a mortgage, you’ll need to pay PMI, which protects your lender against a potential default on the loan. PMI generally runs up to 0.75% of the loan amount, depending on your loan to value ratio and credit score.
Remember that if you still need to file your 2013 taxes, you are allowed to deduct your PMI payments. You’ll find the amount of PMI you paid on your bank’s mortgage interest form 1098. The break is available to homeowners who took out their mortgage after Jan. 1, 2007.
Property Taxes
Property taxes can raise your monthly outlay and may slowly increase depending on a variety of local factors. A typical California property tax bill consists of many taxes and charges including the 1 percent rate, voter–approved debt rates, parcel taxes, Mello–Roos taxes, and assessments. Although there are some exceptions, a property’s assessed value typically is equal to its purchase price adjusted upward each year by 2 percent.
Paying property taxes might sound a little discouraging to the first-time home buyer, but remember that you can deduct your property tax payments! And don’t forget to include any taxes you may have reimbursed the seller for. These are taxes the seller had already paid before you took ownership. You won’t get a 1098 report listing these taxes. Instead, that amount will be shown on the settlement sheet.
Utilities
Utility expenses are a given, especially water, gas, electricity, cable and Internet bills. But don’t worry too much about utilities as you can quite easily control how much you actually pay each month (Turn off the lights at night, shorten your shower time a little and perhaps you don’t need to blast the heater now that it’s spring?)
I can help you estimate the cost of utilities by finding out from the seller the average monthly cost over the last year.
Upkeep and Upgrades
You’ll probably feel some pride in ownership and want take good care of your home. Right? Unless you just really love a backyard gone wild, you’ll want hire a gardener to mow, weed, and care for beautiful flowers and shrubs. Reserve some time and money every month for upkeep inside and outside your home, from landscaping to flooring to appliances. This will not only make for a healthy and comfortable living environment, it will also keep up the value of your home.
Once you tally these costs, you may need to adjust your price range. But that is okay, because it will make for a smooth and financially comfortable transition into your new home. There is no need to feel discouraged when you look at these costs. Just remember that there many benefits to owning a home as compared to renting. You will receive several special tax deductions and you will be building up equity in a home! Doesn’t that sound much better than just spending money on rent without investing in your future?