It is part of the American Dream to own a house. While there is nothing wrong with renting, and in some cases it makes more sense to rent than to own, many people like the idea of owning their home. But it can often be the biggest financial mistake of their lives because they failed to take into account exactly how much renting that house is going to cost. Here is a quick way that you can figure out what you can afford when you buy a house.
Principal, Interest, Taxes, and Insurance
These four components, often described as PITI, are what most people look at as the cost of their home. And they do make up the bulk of the monthly costs, but they’re not all of them.
It is easy to figure out what your PITI payments will be. A mortgage calculator can help to determine them based on current interest rates, county documents will get you previous year’s tax payments, and an insurance agent can get you a quote on the insurance.
If you are basing your monthly costs on PITI alone, you will be stretching your budget thin.
Utilities Cost More than You Think
If you are moving from an apartment, or a house that had all utilities paid, into a home, your utility bills will be a lot bigger than you imagine. Since every home is different, and the age or size of the house makes a huge difference, it is difficult to properly guess what these bills will be.
The good news is, though, that the previous owner should be able to tell you roughly what they pay in utilities. Now you’re going to have some variations due to lifestyle, but for the most part you can safely estimate what you will be paying.
Add the estimated utilities to your PITI to get a closer guess to what your home will cost.
Ongoing Maintenance and Upgrades Add Up
The good thing about upgrades is that a lot of the time it isn’t regular. Hot water heaters only need replaced every 15 to 20 years, furnaces last 20 – 30 years, and appliances rarely need upgraded. However, those costs can sneak up, especially if you fail to maintain your home.
In order to have enough money to care for your home, you need to be sure to have an emergency savings fund. One dedicated solely to this is even better. Every month $100 to $500 should be put into the emergency fund (depending on the age of your home and when you think things will need upgraded).
Add these costs to your PITI and utility estimates.
True Cost of Home Ownership
You may be surprised that based on the true costs, you might not be able to get into your dream home… at least not yet. Instead, start smaller and build the house into a home. Then over time, as your income increases and you grow equity in your house, you can upgrade to something bigger and nicer.
Avoid a lot of headaches later by purchasing something that is well within your budget. Your pocketbook and your sanity will thank you later.
