I’ve seen a number of people in a variety of forums recently mention “well I could buy a house, the mortgage payment would only be a few hundred dollars more than my current rent”. Unfortunately, what many people don’t realise is the associated costs of home ownership. Here are some of these costs which you should consider in your pre-purchase budget:

Before you move:

• Down Payment: While it is very possible to get a home loan without a down payment these days, having one brings a number of advantages: first of all, you’ll pay less. If you purchase a house at $250 000 with no down payment, you’ll be paying $1600 per month (at 6% interest). However, with a $25 000 down payment, you’ll only be paying $1439 per month, saving almost $200. This will save you an enormous amount of money. Also, the bank is more likely to give you a better rate if you have a large down payment, which can reduce your costs. Having a down payment is definitely a good idea. I would strongly recommend having at least $5000 to put down.
• PMI: However, if you don’t have a 20% down payment, you’ll likely have to pay PMI Insurance, which essentially insures the loan for the bank if you are unable to make the repayments. This will have to be factored in to your budgeting as well.
• Closing costs. These are generally 2-7% of the value of the home you’ve purchased, and have to be paid before you move into the home. This includes taxes, title insurance, financing costs and other settlement costs.

While you move:

• Furniture. If you’re going from a bachelor apartment to a 2-or-3 bedroom house, chances are you’re not going to have enough furniture to fill the place. You will most likely end up in IKEA, trying to find some stuff to fill up the space, and it will cost you money. If you do have the willpower to not purchase anything else, that’s excellent! You’re part of the minority and you can ignore this part.
• Moving costs: If you’re moving across the country this can get expensive, especially if you’re not the type to rent a budget truck and hire actual movers.

After you move:

• Property taxes: Many people completely forget that they have to pay taxes on their property. Furthermore, as your home’s value increases, so do your property taxes. While there may not be a huge risk of that if you’re in the USA, in certain parts of Canada you can be paying a significantly larger amount of money in the future for your property taxes.
• Maintenance costs: Things break down in houses. Unfortunately, now that you own yours, it’s not up to your landlord to pay those costs anymore. You’ll need to be able to spend a little bit of money when something inevitably goes wrong, and you need to budget for that scenario.
• Insurance: you need fire insurance, flood insurance, etc. These costs can add up, and they are required. Be sure to shop around and make sure you do some research before purchasing any sort of home insurance.

There are a number of costs involved in home ownership on top of the actual mortgage payment. You need to be sure that you had adequate savings to be able to afford a home and that you will be able to continue the repayments in the future. It’s entirely possible: millions of people have done it. You just need to step back, look at the big picture, and perhaps buy a townhouse instead of a house, or a smaller one which in ten years you can upgrade from. Just consider all of the costs, for your financial security’s sake.

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Have you ever wondered whether or not you would be able to afford a mortgage payment, on top of other home owning expenses? Do you currently own a home and wonder whether or not you can afford to upgrade? There’s one way to find out: try it without consequence!

Regardless of whether or not you think you can afford a new home, an upgrade, etc, I would always recommend doing this for a few months before making a final decision. Choose a home, and using a mortgage calculator, determine what your monthly costs would be. Add a percentage point to the current rates just to be sure that in five years you will still be able to afford it.

Once you know your monthly mortgage payment, take that number and add 5-10% for maintenance, property taxes, etc. This is your total cost. Subtract your current rent (or mortgage payment) by this number to find the difference you’ll be paying each month.

As an example, say you’re paying $1200 per month in rent, and your dream home, costing you $250 000 at an interest rate of 8%, would cost $1908 monthly over 25 years. Adding 10% for home care and maintenance, your total costs for the new home is $2091 per month. As such, you’re going to be paying $891 more per month.

Now that you’ve got the numbers in order, it’s time to put this into practice: every month, stick $891 in a high-yield savings account. Not only will your savings increase (which you can add to the down payment for your home!) but you’re now living at the level which the house will cost you.

You need to live at this level for at least three months, but by all means keep doing so until you’ve accepted the idea that you will be able to continue living at a comfort level which is acceptable to you. If you find that you can take the change easily then you’re ready to make your purchase. If not, well while you have decisions to make, you at least didn’t make the purchase before discovering this.

Too many people don’t understand the lifestyle changes often associated with a higher mortgage rate. Finding out what it’s like beforehand is a great way to avoid making a major financial mistake.

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