For renters who are planning on buying a home, a plan is a necessity. Creating a budget and saving for a down payment are a few things you need to think about if your planning the big move.
Buying a home is a big deal, don’t go into it without understanding the full cost of home ownership. For a renter, a single rental fee usually covers your mortgage payment. But as a homeowner, four main factors go into your monthly housing payment: interest, taxes, insurance and principal. Understanding these costs will help you find the right priced house for you.
Principal and interest comprise your monthly mortgage payment, with the principal paying down your loan balance and interest paying the fee for borrowing the money in the first place. Use a mortgage calculator to determine how much of your payment goes towards the principal and how much goes towards interest. Try this one: http://www.mortgagecalculator.org/
Taxes: Property taxes are assessed by the county you live in. They average about 1.2% of your homes value each year.
Insurance: Homeowners insurance is required when you have a mortgage. Lenders require that it covers the cost of rebuilding the home if it ruined by a disaster. This replacement cost is determined by the insurer and must be agreed upon by the lender. It costs anywhere between $700-$1,200 a year for a single family home.
CONDO OWNER? There’s a fifth monthly cost if you plan on buying a condo or a home with an HOA. The fee usually covers common area amenities, landscaping, ongoing upkeep and future maintenance like roof replacement or painting. The fees range from $100-$1,000 depending on what kind of condo your buying.
TAXES: There are tax benefits to being a homeowner! Mortgage interest and property taxes are deductible when you file your annual tax returns and reduce taxable income. These deductions lower your cost of owning a home. A $300,000 home with 20% down and a 30-year fixed mortgage at 4%, the monthly principal, interest, taxes, and insurance is about $1,545. Tax deductions reduce that price to $1,215.
DO THE MATH: Most renters judge the cost of renting vs. buying by comparing principal, interest, taxes and insurance to a rental payment. But to get a real comparison, you actually have to look at the after tax benefit of home ownership costs vs. Renting costs. When comparing, don’t forget to make a pros and cons list.. and remember to factor in the down payment.
FIND THE RIGHT MORTGAGE: If you don’t have 20% to put down, you can still get a mortgage with as little as 3% down. If your down payment is less than 20% though, you have to pay mortgage insurance. Which is about .85% of your loan amount. ( and it isn’t tax deductible.)
KNOW YOUR SCORE: Your credit scores are important in getting the best mortgage rates. Lenders want reliable on time payment history. If you only have one credit card, consider obtaining more credit. When you first open a new account, your score can drop 5 to 15 points, then come back up when you’ve established good payment history.