Breaking Down Homeowner's Expenses

Tired of the neighbors? Tired of walking up three flights of stairs? Want more space for your growing children? Newly married and you want to start a family? There are a variety of reasons why someone would want to move. Many times, it has nothing to do with ownership but the freedom that ownership allows. One of the best solutions to any of these concerns is to purchase a home. But, how much home can you really afford? And what are some monthly expenses you should consider as a homeowner?

Mortgage

The search is typically free. Many people start window shopping for a home on real estate related sites like Zillow, Redfin and Realtor. This helps the potential buyer see what’s on the market in the areas they want to live in, what type of prices to expect and more. They will even estimate the mortgage to give the viewer an idea of what they will pay monthly. As with anything, it’s important not to let your eyes be bigger than your stomach. Breaking down the household’s monthly expenses will let you know how much house you really can afford. Living beyond your means is never the best situation to be in because it doesn’t allow you to save. And if all of your income goes into maintaining a home you become house poor. The best rule to determine how much home you can afford is taking your monthly income multiply it by one-third. For example, if your monthly net income (meaning after taxes) is $3,500 then your mortgage should be nor more than $1,167.

Net Monthly Income x ⅓ = Mortgage

$3,500 X ⅓ = $1,166.67

Another way to look at it is you must be able to make at least three times the monthly mortgage payment. Therefore, if you see a home that you like suggesting the monthly mortgage is $1,166.67 then you must make at least $3,500,

Mortgage x 3 = Suggested Monthly Net Income

$1,166.67 x 3 = $3,500.01

If you make anything less, you run the risk of being “house poor” because of the other expenses associated with the mortgage. This amount will include your principal (or loan amount) and your interest payment (cost of borrowing the money).

Homeowner’s Insurance

There are other expenses associated with owning a house. Every homeowner must have house insurance. Home insurance is as important as car insurance. You need it there in case you have an accident. While it is not required by law to have home insurance, it's best practice to have it. In fact, your lender will require you provide proof of insurance by closing. This is to protect their investment (the loan) that is based on the value of the home (collateral). If the home burns down and there is no insurance, it is the same as the loan burning up because there is nothing to validate it. This is why it’s required by the lender. The homeowner benefits too. If the same house burned down taking all your belongings with it, how will you start over? The insurance company will be there to help you rebuild your life. They will pay for temporary housing, cover a percentage of personal belongings value, cover the damages after your deductible, monitor the renovations with inspections and sometimes you still have a little extra spending change. Insurance provides financial peace of mind especially if you live in fire zones and flooding zones. The national average cost of homeowner’s insurance is $1,500 a year. This will give you a premier coverage for basic damages such as, fire, smoke, windstorms, explosions, riots, vandalism, theft, the weight of ice/snow and more. Since we can not control any of those things why not have it covered with insurance for a monthly cost of $125.

Monthly Expenses so far:

Mortgages $1,167

Insurance $125

Total $1,292

Property Taxes

Humans are the most intelligent organism on the planet because we can process thought and because we invented taxes. Yes, I know- nobody likes taxes. Property taxes are based on the assessed value of the home and are imposed by the local government. In Illinois you pay taxes twice a year. If you have an FHA loan your lending institution is paying the taxes for you. If not you are receiving a letter in the mail informing of the tax amount, exemptions presents, the total due and the due date. If you pay more taxes than is required you usually get a refund or a credit. The taxes are used for water/sewer improvements, road and highway construction, police and fire protection, public schools, libraries and community services. Even though taxes are based on the value of the home, local governments vote on tax increases or decreases stating why for either position. This is why you have cities or suburbs with extremely high property taxes. The homeowner gets more community benefits such as great schools, well stocked libraries and generous rec centers offering youth programs and more. If taxes are too high for the homeowner, they may qualify for certain exemptions like homestead exemption or senior freeze. This will decrease the tax amount for a period of time. The average American pays roughly $2,500 in taxes per year. In some states like New Jersey it’s up to $6,000. In Illinois the average tax is $4,500. Visiting your local tax portal will give you an idea of what you will be paying. Even on the aforementioned window shopping sites, you are able to find the tax amount there. Divide the amount by twelve and you have your monthly tax expenses. In my market taxes are roughly $3,300. That’s $275 a month.

Monthly Expenses so far:

Mortgage $1,167

Insurance $125

Taxes $275

Total $1,567

Other Expenses to Consider

After you purchase the car are you done? Absolutely not, you need oil changes, tire replacements, tune up, air filter changes, ac charging and more. The same is true for a house. After you purchase your new home you will need to maintain it. If you have a brand new construction or gut rehab (with a trusted contractor and architect) you will not have to do any major repairs for 7-10 years. Whatever the case it is a healthy habit to set aside at least 10% of the monthly mortgage aside for future improvements and repairs. Another thing you want to be sure to have is a home warranty. This warranty will cover appliances, air conditioning, electrical, plumbing and more. As you can see, setting aside 10% monthly will allow you to pay for the deductible with a second thought because you prepared. Home warranties are typically $500 for single family homes. Outside of that, expect to pay an additional $200 a month for lawn care and snow removal for midwest residents if you don’t want the chore yourself.

You also want to protect your family and investment with a security system. There are some high tech systems linked directly to your phone nowadays so that you are able to lock the door when you are away or see who’s ringing your doorbell. Having a security system in place cautions offenders from robbing or vandalising your home. If they still happen to get past your system, which only alerts you and/or the police when something is wrong so that you can investigate immediately, there’s still your insurance coverage to help pay for the damages. The $60 a month and $100+ for a fully loaded system. Again, it’s a peace of mind situation.

Monthly Expenses so far:

Mortgage $1,167

Insurance $125

Taxes $275

Maintenance $117

Lawn Care $120

Alarm $60

Home Warranty $42

Grand Total $1,756

Realizing what it takes to maintain a home is the real battle. However, now that we recognize the expenses we can make an informed decision about which house is the right one. Sure you want a design that is appealing to the eye. But, you are paying for way more than you think. Budgeting accordingly will help you choose wisely.