How to Avoid Being House Poor

Maria Marconi-Fricano Designated Managing Broker March 17, 2015

How to Avoid Being House PoorBuying a home is exciting! If you’re young, it gives you the sense of formally stepping into the adult world. If you’re at some other life stage, (marriage, starting a family, empty-nester) the idea of a larger or smaller space of your own gets those possibility juices flowing.

However, in the midst of the exciting rush into new home ownership, the temptation to bite off more than you can chew financially is strong enough that potential homeowners ignore that nudging unsettled feeling, or even the warning bells clanging in their heads. Once the transaction is complete and move-in day is just a dim memory, the reality of monthly expenses takes over.

Does that mean you shouldn’t buy a home? Of course not! What is means is that homeownership can change your lifestyle in ways that you may not anticipate. If you’re looking at buying a home, try incorporating those changes into your life beforehand to see if they are livable.

Higher monthly payments

For some buyers, the actual mortgage payment is less than they pay for rent. In fact, many would-be buyers consider this as the basis of their potential move into ownership, and marketers promote the idea as well. But, ownership requires more than just making the mortgage payment. There are addional monthly expenses to be aware of that include:

  • Insurance: Homeowner’s insurance is much more costly than renter’s insurance. If you own a single-family home, the cost of your coverage is based not on the home’s market value, but on the cost to rebuild it after a destructive event. If your home has special architectural details, or other unique attributes, your insurance may be higher because replacing damaged detailing may require specialty products. If you live in a storm-damage area (hail, tornados, wind) or flood plain, you’ll need to cover those instances as well. Your insurance also includes coverage for your furnishings.
  • Private Mortgage Insurance: If your mortgage arrangement requires the payment of private mortgage insurance (you made a smaller than conventional downpayment or your credit is less than stellar, for instance), the amount of your monthly payment may be increased to pay PMI. To be clear – PMI is not for your protection, it is for the lender’s protection.
  • Association Dues: Condominium ownership nearly always requires payment of monthly, quarterly, or yearly association dues. These dues pay for the upkeep and repairs of the exterior of the building, pool maintenance, landscaping, liability coverage for community property and may include other items as well. In many communities, even single-family homes can require association dues to cover parks, playgrounds, pools and other shared common spaces. Association dues can cost up to several hundred dollars each month.
  • Property Taxes: Unlike renters, property owners pay the taxes used to operate cities, school districts and other municipalities. Your tax money maintains roads and pays for street-sweeping or snow removal, clearing of drainage systems, installing and maintaining street lamps, building and caring for parks and recreation facilities. In cases of newer construction, there may be special assessment taxes to cover new roads and sidewalks, traffic lights, and other new installations required by the city. Typically, special assessments end after a certain number of years.
  • Local services: Often, services such as trash, water and sewerage are covered in a renter’s monthly payment. However, homeowners typically pay for these services individually, apart from their mortgage payment, so those costs must also be included into the monthly expense budget.
  • Maintenance: An owner is responsible for maintaining all aspects of their property. That includes the costs to replace everything from light bulbs to a furnace and repair dripping faucets or a leaky roof falls to the owner.

 

Have a plan

Before purchasing a home in a given area, find out an average of these other costs. To figure out interest and PMI, check out a mortgage calculator. For property taxes, search the local county records or ask your real estate agent to find out the prior year’s assessment. Add the monthly extra for all of these items to the potential mortgage payment. If it is more than you pay for rent, try living for three to six months paying the difference into a savings account that you do not access.

You may be willing to make sacrifices to afford the home of your dreams, but remember that you’ll need to live with those sacrifices for a very long time. Giving up cable, not eating out and delaying buying new clothes seems doable in the first few months, but eventually, you may tire of the restrictions to your lifestyle. That’s why it is important to know before you buy a home how much monthly outgo fits into your lifestyle.

As a real estate professional for more than 20 years, I know just how important it is for homebuyers to fully understand their financial standing prior to purchasing a home; which is why in addition to making it my practice to review the detailed expenses of homeownership with my buyers, I also encourage them to partner with an experienced, professional financial advisor who can help them establish and maintain a solid financial foundation to meet their lifestyle needs.

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