Cost of a home - Entry One - Budgeting for your new home

It quickly became apparent to me the responsibilities that came with home ownership. Financially, work wise, planning, etc. owning a house was a far greater endeavor than I originally anticipated. I used to ask a certain family member "So how is married life treating you?" and his response would be "Man, I've got a mortgage payment now." At the time, I would laugh, taking it as a joke. When the tables were turned, the sincerity of the comment became all too familiar. Having been married for almost a year (three weeks away) without a doubt I would at least compare the responsibility of home ownership with that of the commitment made at the alter. Not the vow to love, cherish and honor yada yada yada, but the need to work as a team, communicate, plan and compromise.

Whether you are married or single, if this is your first home or you have owned a home before, whether you are buying something to live in short-term or long term, there are a number of things to consider before making what for many is the biggest investment in their personal portfolios. Not doing your homework could cost you THOUSANDS and could destroy a budget. Taking all the necessary steps could bring with it untold earnings in home appreciation, savings and just personal satisfaction. One of my favorite past times is watching other people move. As I look on with a cold beer in my hand I'm just overwhelmed with the satisfaction that I don't have to be doing all that heavy lifting and packaging on a beautiful weekend. So before you buy a home, do all your homework, so you don't have to move more than once.

Some of the things we are going to have to considered when looking to buy a new home:

1. What to look for and budget - What can you really afford? Where do you want to live?
2. Selling your current home - What does it take to get the most out of your current place?
3. Expense and savings of moving in - Now that your in, how do we save some $$$

We are going to start with the planning. The first step is sitting down and preparing a budget. What can we afford? Your can live in a pipe dream, or you can see what you can actually spend on a home. More important than what you can afford to buy, is what you can afford to maintain. I've know folks who bought a home they had the cash for, but couldn't keep up with the monthly payments. Even if you could, do you really want to? I know you love your fancy cell phones with the fancy data plans and fancy blue teeth :) are you prepared to sacrifice some of the things you enjoy for a bigger home than you can easily afford. So think about these expenses:

1. You monthly mortgage payments (principal and interest and possibly PMI)
2. Property Taxes
3. Home Owners Insurance
4. Home Owners Association Dues
5. Utilities (water, gas, electricity, sewer, cable, etc. most get more expensive the bigger the house)
6. Landscaping/Pool Maintenance fees
7. Maintenance (there is ALWAYS some problem with the house)
8. Alarm System

There are a few more but they get smaller in cost. Your need to add all of these up and make sure your cashflow can keep up. As we will talk about on another post, you can find savings in some of these areas since your principal payments are essentially saving and there are currently many tax breaks when owning a home. But we will get more into that later.

I strongly suggest being able to put twenty percent down in cash on the home you wish to buy. In most cases (research FHA and other government loans for exceptions), if you can't put a full 20% of the appraised value of the home down, you must pay what is called Private Mortgage Insurance (PMI) which is an extra fee because you are more of a risk to the lender. It makes it easier to afford a home upfront with less cash, but its going to increase your monthly expenses and put further strain on your budget. If you are short of the 20% but are still comfortable with your monthly cashflow, think about borrowing from your 401K to cover the difference. This will not only help you avoid PMI but lower your interest payments as well. While you will still have to pay interest on the borrowed money from your 401K you are paying the interest to yourself.

A huge area of focus should be your interest rate. There are so many options out there and each have pro's and con's. The traditional 30 year fixed mortgage will make your payments as small as possible and the fixed over the long term, but will most likely have the highest rates. On the other had, if you have great cashflow, think about taking a 15 year fixed mortgage. It cuts the time to pay back your loan in half and avoids a ton of interest expense, but requires your monthly payments to be much more sizable. A third option is to review adjustable rate mortgages (ARM's). While I would stress extreme caution with these, as your interest rates will begin to move (almost certainly up) after the set time frame, if you are certain that you will have sold the house you are buying by the end of the term, they often carry much lower interest rates. They have anywhere from 1-year ARMs to 7-year ARMs.

Within the coming days, I will try to post a picture of a loan amortization schedule from Excel that I created and walk through all the steps in creating your own. It only takes a few minutes, but in doing so, you can easily change just a few cells in Excel and calculate your mortgage payments for a variety of different scenarios.

Property taxes are large payments that many people forget to calculate when buying a home. Most often, the tax rate is only a couple of percent at most, but on a large home that could be thousands and thousands of dollars a year. Usually, this is broken out into 12 monthly payments that you pay your mortgage provider as an "escrow payment" and then they will pay this for you. You usually pay them as part of your monthly fee precisely because so many people forget to save for this large yearly (or semi-annual) expense. However, if you can plan on your own and force yourself to save for that expense, I would recommend not including an escrow payment to your monthly mortgage payment, as having this money sit in your own bank or investment account can generate returns over the year for YOU not the big bank institutions.

Finally, it is key to understand how all the other smaller expense can really add up. From utilities to landscaping, these are expenses that usually get larger the bigger the house you buy. Talk with people in the area to get a feel for how much damage this will have on your budget.

THE MAIN GOAL when planning to buy a house is to figure out what scenario gives you just enough wiggle room so that you aren't stressing every month to pay the bills. You want to be able to enjoy and improve your home, not see it turn into the greatest source of stress for you and your family. That will come when your wife decides she is going to decorate everything in the house and that your role is finished when the keys are handed over.

When my wife and I moved into our current home, she told me I could have a "Man Room" all for myself. Within three months, that "Man Room" had been painted green, pictures of flowers were on the wall, her grandmother's desk and a third generation bunny hutch lined the room and any sense of testosterone had been sucked from the very being that was to be my man room. So gentlemen reading this post, when you are done reviewing your housing budget, prepare to spend your evenings drinking a glass of scotch in the garage where you can cry all of your shame away.

Sincerely,

Coco