I’m on a home-buying streak here, tackling how to save for a house and how much you need to buy a house this week, so let’s keep it going.
A light bulb went off while I was talking with Heath in the comments about the components of a house payment. It used to be that a mortgage accounted for 70, 80, maybe 90% of what you were paying out every month for your house.
No longer the case, it seems. Those of you shopping around at these new price levels may have already realized this—in many respects, budgeting for a home is no longer about the mortgage.
Of course, that depends in large part on your target price range and where you live, but it’s been my experience.
Instead, the mortgage has become a much smaller percentage of the total payment, with insurance, taxes, assessments, and other fees remaining at bubble levels of lagging behind, and eating up a larger percentage of house payments are a result.
I might expect to pay about $475/month on a mortgage for a $100,000 house. At the same time, I could easily be paying $150/month for taxes, another couple of hundred for insurance, $50 for PMI, and $300 or more for community fees (this varies widely and some people I know are paying through the roof!).
What Does it Mean?
This is huge, because the only fixed part of your house payment is the mortgage. During the days when that made up the majority of that payment, you could reasonably expect your home expenses to be “fixed.” In fact, that’s one of the “traditional” benefits of owning a home.
But when 50% or more of your payment is in things that vary from year to year, that predictability is shot. If a hurricane hits the neighborhood, your payments skyrocket. If property values rise dramatically, your payments skyrocket. If 80% of your community moves out and you’re left supporting it, your payments skyrocket. And on and on…
What’s the Solution?
I think there is only one way to protect ourselves from this kind of unpredictability—predict it. Back well off from what the bank tells you that you can afford and account for future increases in any one of the variable areas of your house payment. Your future budget will thank you.
What do you think? Have you found this to be the case? Do you already own a home and have experienced one of these unforeseen rises in costs? If you’re shopping for real estate right now, how are you planning for these? Share your thoughts!
Fiscal Fizzle 
I think one key is to try and disentangle as much of this as possible from your actual mortgage. Avoid escrowing your taxes and insurance so that money can be working for you during the year. Work hard to get out of PMI or get a second mortgage at the time of the purchase to avoid PMI altogether. I did this in 12/2008, then re-financed last year and was able to get completely out my HELOC and escrow. It takes work, but it’s very freeing.
Love your suggestion, and definitely something to do if you can. On the matter of escrow though, does it make a difference in the end (in terms of the actual money going out of pocket)? Not really. But like you, I still like to be in control of my cash. 🙂
We have bought two houses. The realtors showed us houses we could “afford” and the banks told us the “purchase price” we could have. Ignoring them, I set my own price by taking my present payment (the first time was rent, the second was the mortgage) and doubled it. Then with Quicken and working backwards, including the interest rate, I figured out my loan amount. I wouldn’t budge from that, and found exactly what we wanted. List exactly what a dream house would include, then list the bare necessities. Set a minimum number of houses to look at before researching insurance and taxes. Add those numbers into your preset mortgage payment. If you have time, pay yourself that payment and see if you like how you live (that’s from Suze Orman). The difference saved is your down payment. Avoiding PMI is honorable, but if the house and price fit, go for it. The only thing I wish we did differently was plan the prepayment before hunting. Prepaying in the beginning make the biggest dent, and we didn’t do that.
I really like Suze’s suggestion–I think it creates a pretty accurate test. I’m curious why you say you “doubled” your existing housing payment. Is that just a rule of thumb or based on what you thought you could afford at the time, etc.?
It was an easy number to work with. I figured that if I couldn’t afford twice the payment, then I shouldn’t buy a house. Both times, the mortgage payment was less. We now live in an area with higher housing prices, so I would triple or quadruple, depending on what my want and need lists are, and, of course, income.
Wojo,
I’d love to see you do a comprehensive post/advice on buying a home. I’m thinking about buying in about a year or so, and a lot of this stuff is over my head, unfortunately. Heck, I don’t even know how to estimate the cost of home insurance (percentage-wise) in Florida, nor do I even fully understand PMI, and how to avoid it! I’m also thinking an FHA loan may be best for me.
Btw, I did some research on buying a home in unincorporated Palm Beach County that is around 8 years old, and I’d save a bit on taxes, but then I discovered the HOA is $325 per month on a single family home! Wow! I found a similar home in a small city/village nearby, but the home is 20+ years old, however the taxes aren’t much higher and the HOA is $80.
For me, I want to live in a newer home and community, but when the realtor told me the cost of the HOA, I decided it’s too much. The realtor theorized it’s because so many homes are empty in the neighborhood, and very few are paying the HOA.
I’m still a few months from even being able to look at homes, but having goals in mind helps out.
heath
ps-Thanks for the shout out!
I can definitely put something together. HOA of $325 is honestly low for some of these new developments. Friends of mine are paying over $600 a month!!! That’s why I will NEVER live in a gated community. 🙂
$600?! For a single family home?! Wow! Yeah, the $325 is gated, so there you go. But none of those fancy, Boca Raton-style mega entrances that belong at the Taj Mahal.
The other place I’m looking at in central Palm Beach County isn’t gated, and I’m wondering if the house I’m looking at, specifically, is empty or not. It’s worth $160,000 but sold 5 years ago for $350,000.
heath
Yikes, $600/month for HOA! no thank you.. I hate ours and we only have to pay $150/month.
I used to own a comment, back when it was WAY too easy to get a loan and you didn’t need to know anything like before the real estate bubble, and now. In 2004, I remember going in and finding out the seller wasn’t going to pay off an assessment, so I was on the hook for $40 for my condo’s HOA (for 4-5 more years), bringing the total to $210 a month. Not bad.
When the condo sold in early 2008, my HOA was close to $400 for all sorts of things that many of us didn’t think was necessary.