The idea of homeownership is often romanticized. Who hasn’t dreamed of the perfect white picket fence or sipping a cold drink on a front porch swing?
For many new homebuyers, though, the reality of being responsible for home upkeep, variable taxes and other hidden expenses can be hard to handle.
Rather than getting in over your head, leverage these simple strategies to choose wisely.
If you’re buying into a condo, apartment or townhouse community with a homeowners’ association (HOA), check to see how solvent the organization is. HOAs require monthly dues to be paid, often to cover services like trash pickup, community landscaping and other amenities, but unexpected upkeep and repairs can be assessed to all members, whether or not their unit requires maintenance. Before Sarah Roby moved into her Chamblee, Ga. condo she says, “Each condo had to pay $8,000 for waterproofing the building.”
Work with your real estate agent to confirm that the HOA has ample funds in reserve to cover a big expense (like the entire building needing a new roof or shoring up the foundation) and see how long it’s been since residents have been assessed.
If you’re only factoring in the hard cost of your mortgage when choosing your home, you could be leaving out sizable monthly expenses. Property taxes, homeowners’ insurance and utilities are the other significant expenses you’ll want to factor in to determine if the monthly cost of home ownership is workable for you. If your state allows you to choose your utility providers, shop for the best rate. Ask the seller to provide monthly summaries of utilities costs so you can be sure you can afford it.
Dallas, Texas resident Randy Katz was thrilled to score a home with a pool, but the summer months can mean almost daily topping off, meaning high water bills, so it wasn’t immediately apparent that there was another issue going on when his utility costs climbed. “I had a $350 water bill once. I discovered I had a leaking sprinkler system,” he says. “When I did the research I found out that if I had it fixed and submitted proof of the repair to the city, they’d go back and give me credit. I fixed it, submitted the proof and got credit.”
While it’s hard to predict how taxes might rise in the future, you can look at trends of home prices in the area. If they are climbing quickly, it’s safe to assume that your taxes will go up proportionately with rising home values. Budget a little extra for your escrow account each month to avoid getting caught short come tax time.
Having a reliable, licensed home inspector is vital to know your new home inside and out. A savvy inspector could uncover things you wouldn’t even know to look for so you’ll go into owning a new property with all of the vital information.
Spend time going over the inspection report line by line to understand what problems are merely cosmetic or irritating and what can signal big, expensive issues in the long run. For instance, a small crack in the wall may seem like an eyesore, but it can be the harbinger of a costly foundation issue. Similarly, a small water spot on the ceiling could be a clue that the roof needs to be replaced. You can also use the inspection report as evidence to compel the seller to take care of some issues before they become your responsibility.
Getting adequate home insurance is a must, and doing the research can provide clues about what risks lie in the property. For instance, if your prospective home is in a floodplain, insurance will be more expensive and may give you pause about that particular house.
Shop around for the best rate and work with a trusted insurance agent, carefully examining the coverage offered and the deductible. A higher deductible means lower monthly premiums, but if you tend to live paycheck-to-paycheck, think carefully about whether you could afford a $1,000 deductible (or more) if you had to use your homeowner’s insurance. If the answer is no, opt for a slightly higher premium and lower deductible.
Choose your mortgage wisely
When choosing a new home, it’s vital to pick something that fits into your budget and won’t stretch the limits to make you house poor. Most experts recommend that your mortgage be no more than 20 – 30% of your monthly take-home pay (after taxes).
The kind of mortgage you choose is also important. While a variable rate mortgage might let you qualify for a more expensive home, those products mean that your monthly payment can go up dramatically if interest rates rise. If you want to know what payment to expect each month, choose a fixed rate mortgage.