How can I “count the cost” when buying a home?

This is the fourth article in a series of articles about Buying and Selling a Home in New York State. Click here for the first installment in the series. Subscribe to this blog for future installments.

Q: How can I “count the cost” when buying a home?

A: The first step with any purchase, large or small, is counting the cost. Can you afford the new home? Do not rely on others to make decisions that you will have to live with. Commission sales people (real estate brokers and mortgage brokers/consultants) have an inherent conflict. The more you spend/borrow, the larger their commission. Attorneys can provide valuable counsel and insight, but they should not be asked to make decisions for you.

When things go wrong (the loan payments cannot be made), people tend to look for someone to blame. “The loan officer told me I could afford the loan.” There have been cases of people being approved for loans where the annual loan payments exceed the borrowers yearly gross income. How could a reasonable person believe that they can afford such a loan?

For buyers, a good starting point is the amount of your current rent or mortgage payment. Does your budget allow for a larger monthly payment? Should you be making a smaller monthly payment? How much cash can you afford to pay toward the purchase price and closing costs? You will need to figure out how much of the purchase price you can pay in cash, while leaving your self enough cash to pay your closing costs and leaving yourself a “rainy day” fund, and how much you can afford to pay on a monthly basis for a mortgage loan, property taxes, and insurance.

Once you have determined the monthly payment that you can afford and the amount of cash (from savings and gifts) you will have available to pay toward the purchase price and closing costs, you can estimate how much you can afford to spend on a home. A real estate broker or mortgage broker/consultant can be helpful at this point.

Lets go through a quick example of purchasing a $300,000.00 house with 90% financing. You will be paying 10% of the purchase price in cash or $30,000.00. Closing costs for title insurance, recording charges, mortgage recording tax, and attorney fees will average about $6,000.00. Real estate taxes will be adjusted at closing (reimbursing the seller for prepaid taxes) and the lender will start your escrow account, so figure on $7,500.00 (between the adjustments for prepaid taxes and funding the escrow account, you should plan on paying 100% of the yearly real estate taxes at closing). You will have to pay for the first year of your homeowners’ insurance policy in advance, so figure another $700.00. A survey and home inspection will each cost between $800.00 and $1,500.00 for a average single family home. The loan expenses will average around $2,500.00. I also recommend a “rainy day” fund for unexpected repairs, maintenance, appliances and equipment of at least $10,000.00. While many buyers are tempted to skip the “rainy day” fund, the reality is that home ownership is expensive and you will be glad that you have budgeted for a “rainy day.” In other words, you should expect that the “unexpected” repairs, maintenance and replacements are going to happen. That is $59,700.00 in cash that you should have available. To avoid private mortgage insurance (“PMI”), which add .5% to 1% of the loan amount to your monthly mortgage loan payments you would need to put 20%, bring the total to $89,700.00 in cash needed to buy the house.

Your monthly payments of principal and interest on the $270,000.00 loan at 5% for 30 years ($1,445.00), escrows for taxes and insurance ($685.00) will be around $2,130.00. PMI at 1% will add another $225.00 per month.

Buyers must also consider their current living arrangements. Are you committed to a lease? If so, when does the lease expire? Can you terminate the lease prior to the end of its term? Do you have to sell your current house before you can purchase a new one?

Once you have “counted the cost” and determined how much house you can afford, you are ready to begin your search for your new home.
The next installment of this series will answer the question, “How can I count the costs when selling a home?”

William E. Duquette, Jr. is an associate on the firm’s Real Estate Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.