First-time homebuyers are yet to really come back to the market as much as they were before the financial crisis. In fact, only 38% of sales this year were to first-timers, down by 1% from last year, and below the long-term average. As the market continues to improve, younger buyers' confidence in the housing market will grow, and we'll see this percentage climb over the next few years.
However, when looking at some of the mortgage calculators and home affordability calculators available online, some of the numbers can be deceiving. There is much more of a cost involved with owning your home than simply paying your interest and principal each month. Before you begin the home buying process for the first time, there are some costs you need to consider.
If you have a mortgage, you will most likely need to pay a portion of your annual property taxes into an escrow account each month. These taxes can range from the mild to the obscene.
For example, the average $250,000 home in South Carolina pays property taxes of around $1,600. In New Jersey, the figure jumps to $6,400. In terms of a monthly payment, it is the difference between $133 and $533 tacked onto your monthly bill.
Another thing to keep in mind is if there is a possibility of renting out the home down the road. Let's say you buy a two-bedroom "starter home" with the goal of upgrading in a few years and keeping the small house as a rental property. In many locations, property taxes on rental properties and second homes can be significantly more than for a primary residence.
For instance, one such "starter home" that would sell for around $100,000 that is owner-occupied in my town pays $931 annually in property taxes, according to the county assessor's website. The tenant-occupied home just three doors down with the same floor plan pays $3,334.
In many places across the country, regular homeowner's insurance is sufficient, and will normally run you about $875 per year on a $250,000 home. It will also cover a certain amount of contents inside the home, say $100,000 worth. However, depending on where you live, there may be more to the story.
If you live in a hurricane-prone area, like much of Florida, your mortgage services might require windstorm insurance, which covers things like your roof blowing off in a storm, or an airborne tree branch flying through your window. Windstorm damages are extremely hard to predict, and therefore very few companies offer the insurance. $250,000 in windstorm coverage will cost around $3,000 annually, and could be more or less depending on how windstorm-resistant your home is.
Although hurricanes have been known to cause flooding, a windstorm policy doesn't cover flood damage. Much of the coastal areas in the U.S. are in "flood zones," and flood insurance will be required. Private companies are beginning to offer flood insurance, and $250,000 in coverage will run you from between $2,613 and $9,177 annually, depending on how flood-prone your area is.
In addition to predictable expenses like taxes and insurance, there are many other costs involved with owning a home that renters sometimes don't think about. Roofs need to be replaced every so often, as do air conditioners, appliances, flooring, and pretty much everything else in a house.
How much house can you afford?
If you plug a mortgage loan for $200,000 into a mortgage calculator ($250,000 house with 20% down), it will tell you the monthly payment will be $1,000.34 at the current interest rates (4.39% as of this writing). However, when figuring out your true payment, you need to calculate the fixed costs above and factor them in.
If you live in a flood-prone area, your monthly payment could shoot up to $1,900 or more, depending on taxes and the condition of the home. A high property tax rate in an inland area could mean a payment of over $1,600, and that's assuming no flood or windstorm risk.
When calculating how much house you can afford, it's very important to take all of these factors into account. While homeownership definitely has many benefits, it's important to get a realistic sense of how much your house is really going to cost.