Are you thinking about buying a home but don’t know how much you should spend? In this video, I’m going to walk you through how to determine a monthly housing payment you’re comfortable with. By breaking down the costs of homeownership, you’ll be able to make the best decision that will be right for you.
Your Monthly Housing Costs
Buying a house can be an emotional decision, and sometimes emotional decisions can be bad ones. If you’re thinking about buying a home soon, the first and most important point to consider is how much you are willing to spend.
The first place we need to start is to break down all the monthly costs associated with homeownership. In addition to your mortgage payment, there are other costs of owning a home every month. You need to find out what your cap of expenses is that you’re willing to pay every month to own a home.
One way to do this is by reverse engineering. This is the word that I like to talk about with my lender all the time. We want to figure out how much you’re willing to spend each month so we can reverse engineer a purchase price.
Mortgage Payment And Taxes
If you’re obtaining a loan to purchase your home, there are going to be two major components of that payment. First, you’re going to have your principal payment plus your interest. This is going to be a fixed amount every month for you. A portion of that fixed amount is going to be applied to your principal, and the other fixed part of that will be applied to your interest. Your mortgage payment will never change, but certain other variables will depending on the property. Every property is going to have a tax bill, and every tax bill is going to be different.
The reason they’re different is that properties are assessed taxes at the time of sale based on the price. That’s why you’re going to see varying property tax amounts as you’re looking around—even within the same neighborhood—because it’s all based on time of purchase at the price of purchase.
To give yourself a pretty clever estimate of what your annual property taxes would be in San Diego County, you can use a simple equation. Take your purchase price, multiply it by 1.25%, and that’s going to give you your annual property tax. Divide that by 12, and that’ll be your monthly taxes. If you purchase a home for $700,000, your property taxes are going to be roughly $8,750 per year. Divided out into a monthly payment, and that would be $729 a month. Pretty good fast math, huh?
Homeowner’s Association Fees
One of the other things you’re going to need to take into consideration when buying a home in San Diego County is HOAs. If you are living in a condo, almost assuredly you have a Homeowners Association fee every month. Additionally, single-family homes are often built in PUDs, or Planned Urban Developments. These also have a monthly fee.
Your homeowner association fees are used for trash, water, sewage, termite protection, and general building and grounds maintenance. If you have common area facilities like a barbecue area, swimming pool, jacuzzi, a training room, or manned security from dusk till dawn, those are what your HOA fees cover.
Private Mortgage Insurance
Another expense you might incur related to getting a loan is PMI, or private mortgage insurance. If you’re using a loan to purchase the property, this is something a lender might tack onto your loan if you don’t put at least 20% down. They think that, if you don’t put at least 20% of your own money into the loan, it’s riskier.
Once you get 20% equity, you can have your PMI removed. You need to be on top of that; when you know that your home has 20% equity, you want to call your lender and ask to have it taken off your loan. This way, you’ll save more money every month.
This is also something that you want to talk with your lender about when you’re getting pre-approved upfront so there are no surprises. You can calculate PMI into your mortgage payment to make sure you’re comfortable with your monthly housing expenses.
Searching Within Your Budget
Before you start looking at properties, we have to take into consideration your budget. Then, we have to set up a search that stays within those parameters. This will allow us to look at the right properties for you and your budget.
The last thing you want to do is fall in love with a property that’s way over your budget. I’ve been there before and trust me—it’s not what you want to do. We want to do all that homework upfront to make sure we’re looking at things that you can afford. We don’t want you to fall in love with that three-million-dollar house. I guarantee you’ll love it, but you won’t love the payment.
I hope this helped you identify the various costs of owning a home to help you get better prepared for the process. If there’s anything that I can do to help, please give me a call at (619) 925-2322. I look forward to hearing from you.