Homeownership is a dream for many people. It can seem like a lofty goal with an unattainable price tag attached. But that’s not really how homeownership works. There’s a whole lifecycle of homeownership with differing financial obligations each step of the way. There are also opportunities to shift the timing of some of those financial obligations to bring that goal within reach.
The cost of homeownership is both more, and a lot less, than the sticker price
The price tag is the attention grabber. It’s the big number that jumps off the online listing and the first question out of many buyers’ mouths. But it doesn’t really deserve to be, since it’s not what you’re actually paying for the house (add 20-30 years of interest for that) or what the seller will receive (deduct realtor commissions, closing costs and payoff any open mortgages and you’re close). That’s why instead of price, we focus on the impact of homeownership on your monthly expenses.
The length and type of mortgage you choose will dictate the amount of interest paid over the life of the loan as well as how much of that initial price tag is due at closing. That figure, plus your portion of the closing costs (including appraisals and surveys and title insurance and taxes and underwriting fees and a host of other line items that you can pore through on your Closing Disclosure) get you the keys, but not necessarily in the door.
Be prepared for the hidden up-front costs
Great, you’ve got the keys. Now what? Up-front costs that new homeowners (and experienced ones alike) can easily overlook include moving services, not just the muscle but the $10 moving boxes and $8 shipping tape and $40 rolls of bubble wrap. Storage, utility services activation, home security system installation, drawer organizers and window treatments and utility hooks and thousands of other things will come up and will add up, quickly.
Budget accordingly so that these unexpected expenses don’t cause any extra stress during such an exciting time in your life!
Understand your ongoing costs
Your ongoing costs are set at closing. For the vast majority these include:
- Principal and interest payments
- Property and local taxes (property tax, school tax and more)
- Insurance (homeowners’ insurance and maybe flood insurance or private mortgage insurance)
And then there’s the rest
Plan for the unexpected. From the moment you take possession of your home, whether it’s a new build or historical renovation, your home will constantly be in a state of repair. Make routine deposits into your rainy-day fund to prepare for the inevitable repairs and maintenance issues that will arise. Prioritize your to-do list and take advantage of the window after you take occupancy and before you move in; it’s a great time to refurbish wood floors, blow out the ducts, and paint.
There are trade-offs available
A larger downpayment means less to borrow and lower ongoing payments. It also keeps a borrower out of private mortgage insurance, a surefire way to reduce ongoing payments. There’re a host of loan products on the market: Variable rate, Jumbos and Balloons, Temporary Buy-Downs, ARMs and 3/2/1s and more with catchy and cryptic names alike. To be prepared to discuss these options with your lender, think about your own comfort level with financial risk and the possibility that payments will change in the future. The loan types offer variations on the same benefit: deferred or market-adjusted payments to make tomorrow’s house affordable today.
Numbers still don’t add up?
If you’re feeling sticker shock, don’t despair! The financial picture that you’re looking at represents a moment in time. And times change. If buying now isn’t possible, work with your team – your network of people who support your homebuying journey – to put the foundations in place for tomorrow.
You can also consider changing the plan. Maybe a three-bedroom for now and the five-bedroom down the line? Flexible on location? Less dollars can get you the same amenities in a neighboring, less expensive community.
The goal is on the horizon. Take the first steps today and plan for each phase of homeownership to avoid surprises.