How Much House Can You Afford | Page 2

Homeowners insurance protects your property and home.  Proof of coverage is mandatory before the loan will close.  Insurance protection levels and prices vary by company so be sure to shop around to get the best coverage at the best price.  Your agent will be able to explain the options available to meet your specific needs.  Insurance premiums can be paid through your impound account.

Private mortgage insurance is typically assessed on mortgages with less than 20 percent down (or less than 20 percent equity in refinance transactions).  Your lender will be able to provide an accurate cost and it is usually included in your monthly payment.  The lower the down payment, the more financial stake the mortgage company takes.  The reason for PMI is to protect the mortgage company’s interest should you default on your loan.

Closing costs will be paid when you close on your home.  The amount varies depending on the mortgage company you choose and the home price.  Some sellers will agree to help offset a portion of these costs or, in some cases, they can be included in the loan amount.

Maintenance costs are the most variable and more difficult to budget.  Generally, you can expect to spend 1 per cent of the purchase price each year for maintenance.  If the home costs $200,000, then $2,000 is a good estimate.  Of course there will be times when you need to replace a roof or central heating/cooling system that far exceeds your normal budget.  Other repairs like painting can be done as needed and as money allows.  Buying in a maintenance-provided community or condominium keeps these costs to a minimum but applies to the exterior only.

There are two other things to take into consideration as you determine an approximate purchase price.  Interest rates change daily.  You will not know your interest rate until you lock into a loan.  Many buyers play the “wait and see” game only to lose out on the home of their choice.  Interest rates usually fluctuate by quarter points or less.  The difference a quarter point makes can be very minimal.  For every $100,000 you borrow, the difference between a 6 percent and a 6 ¼ percent loan is $16.17/month.  However, if current interest rates are looming around 7 percent, then a major drop to 5 percent could significantly increase your buying power.

Secondly, the condition of the home may make a difference on how much house you can buy.  Real estate agents and general contractors use three descriptions when evaluating homes on the market:

• “Mint Condition” or “Turn Key”: “Mint Condition” homes have been well taken care of and attention paid to painting, wallpapering, hardware fixtures, carpets, and floors is evident.
• “Handyman’s Special” or “Fixer Upper”: “Fixer Uppers” need a little work ranging from big repairs to cosmetic uplifts.  The best of these homes only require relatively cheap cosmetic improvements.
• “Gut Job” or “Tear Down”: “Tear Downs” typically only have value for the land they occupy.  The home is in such disrepair that only the outside structure is somewhat salvageable.  The home needs everything from new mechanical and electrical systems to sub-flooring and roofing to make them livable again.

“Mint Condition” homes are usually in higher demand than fixer uppers.  They also carry a higher price.  You may be able to buy a bigger home in a choice neighborhood if you’re willing to take on a home that needs some work.  But if you do not have the money for repairs or the know-how to do it yourself, these cheaper homes may cost you more in the long run.  Repairs typically take longer and cost more than you expect.  Sometimes when you begin to repair one thing, you find another that needs to be repaired first, opening a new can of worms.  Do not underestimate or guess the costs of fixing up a home.  Get a professional opinion and take those costs into consideration when making an offer to purchase the home.