Are you thinking about buying a house? If you've been renting, it can be very tempting to consider buying a place of your own. But buying a home is more complicated than just choosing one you like and handing over enough money to cover the purchase price. Most people don't have cash to pay for a home, and that's where a mortgage comes in. A mortgage lets you pay for your home over 15 or 30 years, but it comes with a lot of other costs. Before you start looking for your first home, make sure you can afford all of those costs.
Homeowners insurance: While always a good idea to have, homeowners insurance will likely also be a requirement for as long as you have your mortgage. Your lender considers your house one of their assets as long as you owe them money on it, and they want to make sure their asset is protected. Your insurance costs will vary depending on the location of the home, the risks associated with that location, and the value of the property. You may get discounted rates if you use the same company that you insure your car through, but be sure to shop around for the best rate. You can often have the payment wrapped into your mortgage payment. You can read more about home insurance here.
Mortgage insurance: If you can't make a large down payment, you may be required by your lender to pay mortgage insurance, at least until you have paid down your mortgage a certain amount. The exact amount will be detailed in your closing documents, but usually when you've paid about 20 percent of the original purchase price, you can request to have the requirement removed. The insurance payment will be a percentage of the balance you owe, and while it won't be a large percentage, it will probably add at least a few hundred dollars to your monthly payment. If you want to avoid this cost, make sure you can make a down payment of at least 20 percent.
Mortgage interest: Other than the actual price of the home, the mortgage interest will be the biggest cost; if you have to pay a high rate over many years, you may even spend more on interest than on the balance. Your interest rate will depend on several factors, including your credit scores, the length of your term (in other words, whether you do a 15-year loan or a 30-year loan), and the current rates that banks have to pay to borrow the money that they are lending to you. You can also choose between a fixed rate and an adjustable rate.
Adjustable-rate mortgage (ARM): These are typically lower than fixed rates, but after an initial period (3 to 5 years, generally) the rate will be evaluated by your lender, and it could go up or down, depending on the rates they have to pay to borrow money. If you plan on selling your home within a few years, this can be a good option, but if you plan to stay, you'll have to decide if the potential for your rates to go up is worth the gamble.
Fixed-rate mortgage (FRM): Your monthly payments will be the same for the duration of the loan. You may have a higher initial rate than you would with an ARM, but you won't have to worry about fluctuations. If you plan to keep your home more than a few years, this is a safe, reliable option.
Property tax: Even after your mortgage is paid off, you'll need to pay property tax to your local government. This tax covers the cost of things that are a benefit of living in the community, like public schools and libraries. It's usually paid on an annual basis, but you can have it included with your mortgage, so you can make small payments on it every month instead of paying one lump sum. Property taxes can vary widely depending on the value of your home and the county where it's located. Be sure to find out what the average payment is in the county where you are home shopping, and make sure that's something you can afford. Once you find a house you like, you can get information from your real estate agent about what the previous homeowners paid, so you can estimate what you will need to budget for.
Homeowner association fees: Like property taxes, homeowner association (HOA) fees continue after your mortgage is paid off. Not every home will come with HOA fees, but condominiums and gated communities usually have them, and other planned real estate developments may have them, too. The fees cover the maintenance costs of things like pools, clubhouses, tennis courts, or any other shared amenities that may come with the property. You'll need to find out if the home you are looking at has any HOA fees and decide if the amenities are worth the added cost.
*The calculator is provided as a self-help tool for your independent use and is not intended to provide investment or financial advice. Overstock.com does not guarantee its applicability or accuracy in regards to your individual circumstances, and we encourage you to seek personalized advice from qualified professionals regarding all personal financial issues.
Published March 22, 2013
Updated February 17, 2015