Purchasing a Home: Examining the Costs

This past weekend my husband and I decided which townhouse we want to buy. After working the numbers, looking at different properties, and going through the options, we’ve signed a purchasing agreement on a property at a new development.

Since this is our first time buying a home, we wanted to be as thorough as possible. After all, this is a huge commitment. I wanted to share some of our thought processes for why we chose this particular place.

Deciding on our price range

We wanted to be conservative with the mortgage, so even though we were approved for more, we only looked at properties costing no more than 2.5x our annual income. Since there are guarantees in life, we wanted to be sure our mortgage bill won’t turn into a huge financial burden.

The total amount of the mortgage for the townhouse we chose is approximately twice our annual income. We decided to go with the lower number because we wanted a mortgage that we could afford, leaving some wiggle room for other bills.

Besides the mortgage, we knew we had to look at the other expenses related to owning a place. We started with a spreadsheet template, modified it a bit, and then used it to compare our options.

Home buying costs beyond the mortgage

Property Tax: To get an idea of what our property taxes would look like, I decided to look up the public tax records of homes that were comparable to what we were considering. Our city has the data on their website, so it only took 10-15 minutes to look everything up.

Private Mortgage Insurance: Since our down payment is going to be 10%, we’re going to have to pay PMI. This allows us to purchase the place without 20% down by protecting our lender in the event of a default. When we receive our $8, 000 first time homeowner’s buyers tax credit, it’ll go towards our mortgage principal.

Homeowner Association Fees: While hunting for possible homes, we kept tabs on how much the homeowner association fees were and what they covered. We noted that most association fees covered trash and sewage. Some, but not all, also included landscaping. One townhome condominium complex didn’t include landscaping, and the agent commented that they hoped people would pay an additional fee for the maintenance crew to do the yard work.

One advantage we had was the fact that our friends lived in a development by the same builder and had the same homeowner association company managing it. Thus, we knew what we were getting into. I also checked out some of the HOA bylaws and asked them questions about how they operated. I’ve heard some horror stories about HOAs, and I want to avoid that sort of mess.

Our Place

After looking at the spreadsheet, we narrowed our options and decided on one specific home. We had a back up in mind, but fortunately the numbers fell in line for the place we wanted. After factoring in the extra costs of home ownshership, this new place should be well within our budget.

Your Thoughts

We still have a ways to go before we buy and move into our home. We’re hoping that it goes smoothly, but we’ll try to roll with any punches. I’d love to hear your thoughts and stories with the home buying process. Do you have any tips to share? Do you have any regrets? What should we look out for?

21 Responses to “Purchasing a Home: Examining the Costs”

  1. Anonymous

    Firstly, congratulations on your new home. I’m sure all will work out well and I’m sure reinvesting the $8K homebuyer credits is a solid move.

    Secondly, I’m really impressed by your approach. Too many people either “gut it out” or let emotion take over their decision-making process. My husband and I approached the purchase of our home in a similar fashion and it has worked wonderfully.

    I understand that you’ve already made your decision, however I would also suggest that home buyers get a feel for your neighbors before making a commitment. I realize that on the surface this may not seem focused on finances, but trust me it is. We had a neighbor who could not sell her house because her immediate neighbor kept their home so poorly… the woman took a bath to get out of the property.

  2. Anonymous

    Congrats. Don’t sweat the PMI too much. It is avoidable but in the scheme of things it is not a large amount especially if you are planning to pay down the principal.

  3. Anonymous

    I have to agree with Nikki (18), this is YOUR deal, not the r.e. agent’s or the builder’s. Don’t let them push you around, you’re in the drivers seat.

    Unfornately, one of the characteristics of successful r.e. agents and builders is to convince the buyer that you’re nothing without them. It’s quite the opposite, especially in this market.

    Don’t be a bully, but don’t let them steer you into they’re preferred vendors either. Cut the deal that’s best for you. Believe me, after the closing, both the agent and the builder will be G-O-N-E GONE!

    Oh, one more thing… the r.e. agent and the builder are NOT your friends! They’re just people trying to sell you something, and they’ll be what ever you want them to be until the ink is dry on the contract.

    (Sorry to be so cynical, but from the seat I’ve sat in, I’ve seen this sorry game played out too many times!)

  4. Anonymous

    This is a great post. One other cost you may want to consider is the settlement cost. Generally speaking, you’ll want to tack on a few thousand extra dollars for the title search, recordation fees, etc.

    A lot of home buyers don’t realize they can choose their title company, and more often than thought the average consumer isn’t quite sure what a title company is or what they do.

    Many real estate agents and lenders have their favorite company, but that doesn’t necessarily mean it’s more convenient or more affordable.

    To get a real sense of what closing costs are and what a title company does, you may want to check out this video. It’s targeted toward the DC Metro area; however, the information is solid background for any home buyer.

    View the video: [http://www.federaltitle.com]

    Choosing your own title company can save you thousands of dollars. It’s definitely worth it to at least check.

  5. Anonymous

    One other thing — make sure the loan(s) you get are fixed rates, and do not have any pre-payment penalties.

    I prefer a 15-year for the 80% loan, and a 10-year for the 10% loan — but you might want to go with 30-years on the first, and use the extra money to make extra payments towards the second mortgage to pay it off as quickly as possible, since it will have a higher interest rate (and you do want a true 20% equity stake).

    I see that you said your home costs 2.5 times your income — that feels steep to me — my house was about 1.6 times my income (when purchased), not sure about everyone else.

    Just make sure that you can afford the house on a 15-year payment plan (even if you decide to go with a 30-year note). If you can’t afford the 15-year payment plan, then they house you are looking at is too expensive for what you can afford.

    You want your home to be a joy, not something you grow to hate.

  6. Anonymous

    The only thing I would add is watch out for the little things. I just bought a new construction house and everything is fine for the most part. The one annoyance was the sod. For this particular house, they said there was just sod in front and I was okay with that. I have a plan to put a different special type of grass in the back anyways. I never thought of the side though. I have a little strip that’s missing grass down the side of my house. I talked with the builder but there was no way to make him budge on this. In my opinion that was a very cheapskate and stupid decision on their part, but I didn’t think of it either in the beginning. So my advice is to make sure all that stuff is in the contract from the start.

  7. Anonymous

    HOA fees can definitely stink. We lucked up and got our house in a subdivision without an organized HOA or HOA fees. I have found most Homeowners Associations just turn out to be nosy people who meddle more than they need to.

    On PMI, at least it will fall off once you reach that magical 80/20 split. You will probably have to pay for an appraisal though.

  8. Anonymous

    Good article.

    I agree, make sure you factor in those fees outside of the actual payment. Private mortgage insurance if you don’t put down 20%, insurance, and property taxes. Plus, the insurance and taxes always have the possiblity of going up.

    Also, you may consider a home warrenty if your budget is a little tighter.

    Good Luck

  9. Anonymous

    And to Nancy C’s comment, I’d add this: don’t rely on a housing inspector alone. If you (or friends, or relatives) know any tradesmen you trust, hire them to inspect the systems they know about. You’re allowed to have as many inspections as you like, and these guys don’t charge much to come out and look. In fact, my plumber charged nothing.

    I had a plumber, a roofer, and an electrician inspect the last house I bought, and asked each to tell me what work they thought needed to be done and how much it would cost. That house was 58 years old, so one would expect some costs.

    But in some parts of the country new construction is notoriously shoddy, and so even new houses need thorough inspection by trusted craftsmen. A friend of mine, for example, had a workman climb into the attic looking for the source of what she thought was a plumbing leak in her new house. He climbed down the ladder and said to her, “You’d better have a look at this.” When she climbed into the attic, she saw blue sky! The builder hadn’t bothered to install flashing around the vents.

    Another couple had a roof go kerflooie after the house was a year and a half old. Builders in my state only have to guarantee their work for a year. So the young people were stuck with having to rebuild half the roof on the house. If you can get an extended warranty, do. If you can’t…think twice about doing business with that builder.

  10. Anonymous

    Congratulations on your decision to purchase. I’d recommend an independent inspection prior to closing the house. I have a good friend who is an inspector and says that some of the most egregious erros she’s seen have been on new construction. The piece of mind along is worth whatever the inspection costs.

  11. Anonymous

    Nothing much to add as most people have covered it, but just wanted to reinforce shopping around for lenders. Yes, it takes time out of your schedule, but it’s worth it. And make sure you let the lenders know you’re shopping with other lenders as well. Even when you get quoted a rate, it’s usually not the best possible rate you can get out of them. If they know you have other offers they will work harder to get your business.

    We are just about ready to sign a purchase agreement on a new house and over the past few weeks I’ve been talking to no less than a half dozen lenders and it’s amazing to see the variety of rates and fees being offered. Once you start getting some good faith estimates you can then try to compare apples to apples and see what lenders are stuffing the loan with higher closing fees or luring you with a low rate but adding points.

    And don’t forget, this is a buyer’s market. Don’t be afraid to ask for the seller to cover closing costs, or to throw in a 1 year home warranty. Homes are sitting on the market for a long time these days, and if you can show them the money, they might be willing to give you more of what you want.

    The house that we’re hopefully getting in a few weeks has been on the market for 3 months. The sellers want to move ASAP. They have had about 4 offers so far, some for higher than what we were willing to offer but they were all contingent on the sale of their existing home. We came in and said we’re pre-approved and there’s no contingency and could close in a few weeks. They hopped on the deal and bent over backwards. Took our offer that was 7% below asking price, paying all closing costs, throwing in a home warranty, and they said we could even keep the 3 flat screen TVs and surround sound system.

    Money talks in this market 😉

  12. Anonymous

    @Nickel: Good point. They tried to get us to go with their lender, but we were willing to walk away, so we are using our lender we picked.

    Friends asked if we’re buying furniture, but we’ll do as we always have, and just will hunt through yard sales. For now, though, we plan on waiting a few months after we move and seeing what we need. Of course, we told friends and family they are more than welcomed to give gifts 🙂

    @EZ Thanks for mentioning the calculator. This is something we’ll looking into. I’m noticing others have done 80/10/10 to get out of PMI.

    @Bodark and Kevin: Thanks for the tips! We’re cutting expenses a bit more to build a bigger cushion after we close on the house (rice and beans for a bit) 🙂 . Also, we included some over estimation with our spreadsheets to include unexpected expenses.

    @LOL: We used a realtor to help us look at new and old homes in the area. He was recommended and had helped a relative get a great deal on a home and have it in move in condition.

    I’m going to call and see about the 80/10/10 that people have mentioned. I appreciate any help we can get!

    @MyJourney: Sorry to hear about the A/C unit. I’ll review the warranties with my husband either tonight or tomorrow.

  13. Anonymous

    I bought a new construction condo 2 years ago. It is/was great (until minor AC incident derailed me this week).

    The comments are amazing, so its not worth repeating all of them, however, KNOW YOUR WARRANTIES! AND GET A SERVICE CONTRACT IF AVAILABLE.

    My AC went yesterday (hottest day of the summer here in NY) and I was 3 months out of warranty and I didn’t get the service contract. UGH! Cost me $306 and the problem STILL isn’t fixed

  14. Anonymous

    Couple of points:

    First: you didn’t mention a realtor — you ARE using one right? and not the builders realtor? If not, expect to be raked over the coals by the builder.

    Second: Be skeptical of any builder financing (or any realtor recommended broker). The PMI is a ripoff and pure waste of money. You will have to pay thousands to refinance out of that loan in 3 years, plus the thousands wasted in PMI initiation and monthly payments. Get the loan(s) you are happy with today — I recommend the 80/10/10 as others have.

    FYI — I know this because I got screwed exactly this same way on my first property.

  15. Anonymous

    Good advice in all the comments. Laura, you’re doing the first, best thing by buying less house than you can afford. This is downright countercultural in our slice of the globe! But you’ll have spared yourselves all kinds of issues that go with overbuying.

    3 quick points I’d like to add…

    –Since you’re buying new construction, don’t close unless the house is built to your specifications. Never trust a builder promise at the closing table, even if it’s put in writing. You’re greatest strength is before closing, not after it, when you’ll need to bring legal help into the picture to force what should have been done before closing. Seriously, play hardball here!

    –Builders like to get you to use their lender by paying cc’s only if you use that lender. But in this market, where a qualified buyer is worth their weight in gold, you can probably go with a lender of your choice and make the builder pay the cc’s anyway. The threat of a walk away has great power right now, don’t be afraid to use it. You’re the customer, and the builder needs to make you happy, not the other way around.

    –Never, ever close broke! I know someone else said that above, but it’s worth repeating. Cash outlays for an owner are always higher than for a renter, even after purchase.

    Otherwise, contratulations!

  16. Anonymous

    The other comments are more eloquent, but here is the reality of what your facing:

    PMI = You just bought your lender a new boat. Get rid of it. New loan structure, hard money, borrow from grandma, etc…

    New Houses = They break just like old houses. But more probable, you will want a new ceiling fan, or door pull for the kitchen, etc.. If you are building in your mind that a new house is cheaper – it’s just spending money differently.

    Commitment – After 5 houses in 10 years, skip the commitment-phobia. Buy your equity on the front end and you will always make out. IF you are basing your decision on appreciation… google ‘Speculation’

    All the best in your new home!

  17. Anonymous

    Good Luck with your new home. I’ve moved into several houses and almost always had an expense I hadn’t planned for, so having extra cash available is a good idea. IMO, when you own a home, you definitely need an emergency cash fund. Keep track of the principal of your loan and when you get it down to 80%, contact your lender to stop PMI. They normally won’t do that for you. I used a simple program, Mortgage Matrix Calculator, to compare loans and help track where I was on principal. You can use the program to run amortization schedules. Remember that if you add extra money to a payment, it goes directly to principal and drops the interest you pay on all subsequent payments. I’ve added as little as $20 on a payment. Make sure you write on the check or payment coupon that the extra goes to principal.

  18. If the seller is paying a portion of closing costs, does that mean you have to use their lender? This is sometimes the case with new construction. If you’re in that boat, hopefully they have to match the best rate that you can find elsewhere. This was the case for us — they paid a bunch of the closing costs, but their lender’s rates weren’t very good. With a bit of legwork, however, we got them to drop their rate to match the market.

    Also, having bought both new and existing construction ourselves in the past, I can tell you that your “startup” costs (little tweaks, modifications, etc.) will be higher with new construction. You might want some extra shelves here, a nicer ceiling fixture there, etc. Be prepared for lots of trips to Home Depot! 🙂

    And don’t forget the costs associated with furnishing the place. Granted, this will be similar no matter which place you buy (as long as their a similar size), but it’s something to budget for nonetheless.

    Finally… Maintenance. This is a big one that you don’t have to worry about when renting. Buying new construction helps here, as you’ll likely have a warranty for any major problems and you’ll have awhile before you need a new roof, water heater, etc.

  19. Anonymous

    @Mike Piper: Thanks!

    @RS: I’m glad you love your place. Great job on getting the finances planned out. I hope we’re as squared away as you when closing comes. Part of the incentive is that the seller is paying for $3,000 on the closing costs.

  20. Anonymous

    Congrats!
    Shop around for lenders. I just bought a place last August, and it was worth shopping. For me, it turned out that a 80/10/10 loan (80% primary, 10% piggyback, 10% down) loan priced out better than 90% financing + PMI.
    My second loan definitely has a higher interest rate, that is 1.5 points higher than my primary loan, though.

    They are harder to qualify for, my loan officer didn’t even try it, until he saw I was working on qualifying for an FHA loan thru another company. Still, I managed to qualify: single income, debt-to-income ratio 5.5 (because of the home loan, not other outstanding debt), a credit score 785, and only 1 year of work history. I know it sounds like a bailout worthy loan, but in my area, it’s the norm even with two incomes. I’m somewhat lucky that my single income is more than the two income household average.

    I got a good gauge of the cost of utilities, since I took responsibility for those costs while living with the parents. Factored those in as my normal operating costs, even though my townhouse was 1/3 the size.

    During the home inspection, get good feel for the age of appliances and their approximate cost of replacement. I made sure I had enough $$ reserved, should my roof, HVAC, and water heater fail on me all at once, since they were 20+ years old. I also got the seller to give me a 3 yr home warranty, don’t know if it’s really worth it, but I figure it’s better than nothing.

    Lucky you don’t have to pay back the $8k First Time Home Buyer’s credit! I qualified for the $7.5k one, so I get to pay mine back :-\

    I managed to get the seller to pay a majority of my closing costs, I believe the max you can ask for is 6% of the sell price, but it can’t exceed your closing costs! This keeps the property value high, while keeping money in the bank that you would have otherwise spent on obtaining the loan and get a better rate.

    Good luck with the process! It can be quite a roller coaster!

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