For most people, buying a home is the largest purchase they will make in their lives. People used to believe that buying a home always was better than renting since people assumed home values always would go up. Unfortunately, during the recent financial crisis, many people found themselves underwater, owing more on their house than it was worth.
Now it makes sense to do the math before making a decision. One of the best ways to figure this out is to check the price-to-rent ratio. This is taking the sale price of a home divided by the annual rent. If you can buy a home 20 times the annual rent, it may be better to buy it. If the number is above 20, it may be better to rent.
For example, if the median price of a home of a single-family home in a certain area is $705,000 and the average rental is $3,214, the price-to-rent ratio is 18.28, which means it may be a good idea to buy. Of course, this depends on the neighborhood, how long you plan to stay in the home and quite a few other factors, which brings me to my next point.
If you are going to buy, how much house is too much house? A safe rule of thumb is to aim for all of your housing-related expenses to be no more than 25 percent of your gross income. However, many people only look at only the mortgage of the home when calculating their housing expenses.
Here are seven additional costs in addition to the mortgage you should consider before buying a home, assuming the current median single-family home price.
- Private Mortgage Insurance (PMI). If you don’t put 20 percent down, you usually have to take out a PMI policy to protect the lender. This typically costs 0.5 percent to 1 percent of the entire loan value on an annual basis. If you put 10 percent down, the annual PMI is around $4,800.
- Property Tax. The property tax is different in every area. On Oahu one of the most expensive places to live, the property tax is $3.50 for every $1,000. The median property tax for a single-family home is $2,467.50 per year.
- Homeowners Insurance. Call different insurance agencies to get a quote. The average in Hawaii is $934 per year.
- Utilities. The average home in certain places uses 600 kilowatts-per-hour, which is approximately $2,700 per year. Sewer and water fees are $450 per year. Cable, Internet and phone cost about $2,000 per year.
- Upkeep. When you own a home, you can’t call a landlord if it needs repairs. Hopefully, you had a qualified home inspector walk you through the condition of the home. For example, termite extermination can set you back about $3,000. There may be plumbing, electrical, roofing, painting, landscaping and other types of ongoing maintenance. It can be nerve-racking when faced with a problem in your home. Sometimes, with a bit of searching on the internet, you can normally DIY it. However, whenever there are building problems like your plumbing not draining properly or a leak coming from your ceiling, it is best to call the professionals. You may end up doing more damage than it’s worth. So where you’re looking for lpm services or someone to fix your boiler, leave it to the professionals. Over time, you may also want to add a few upgrades to your home, which can raise your standard of living and also raise the value.
- Appliances, Furniture and Supplies. According to the Bureau of Labor, the average cost for furnishings is $2,224 per year.
- Maintenance Fees. Some home and condo associations have monthly maintenance costs of well over $1,000 per month! This will depend on your area, but it’s a cost to take into account.
In this example, the additional expenses are approximately $18,575.50 (not counting any maintenance fees or upkeep) per year! If we add this to a 30-year mortgage at 4 percent ($3,029 monthly mortgage) the total housing-related costs per year is $54,925.90. If we want to stay at 25 percent of gross income, then per year you will need to make close to $220,000! This assumes you have good credit, too. Figure out your number before you start house hunting.
When you get a property, you’ll have a lot of paperwork coming your way. That paperwork only grows over time, so it’s important that you’re keeping this all in one place. Start creating some sort of storage or filing system to put all your important documents and finances away and in order. Anything from bills to contracts that are to do with the home and the lease, file away properly and ensure they’re kept in a safe place.