Buying a home is often one of the most exciting events in one’s life. Purchasing a home is the cornerstone of the American Dream, and closing on a property represents an exciting new chapter as well as an achievement worth celebrating. But if first-time homeowners don’t entirely understand their upcoming monthly payments, that new home can quickly become a source of doubt, worry, and stress.
Monthly home payments include various fees that go beyond your monthly mortgage obligation. Property tax, private mortgage insurance (PMI), and homeowners insurance are just a few of the common fees and expenses homeowners must consider before purchasing a home.
What Can I Expect When Planning for My Monthly Home Payments?
You’ve probably been told to figure out “how much house you can afford” during your home buying journey.This phrase can be confusing at first but will make more sense once you start calculating your ongoing monthly home payments and what residual costs will look like after closing. So to better understand how to calculate how much house you can afford, let’s review what upfront –– and ongoing –– costs will look like.
What are Common Upfront Costs When Buying a Home?
When buying a home, “Upfront Costs” refer to any fees, charges, or payments you have to make to actually close on your home. These often include:
A Down Payment - Down payments typically range from 3.5% to 20% of the sale price of a home. This amount will vary depending on a variety of factors like your preferred mortgage type, how competitive of an offer you want to make, and whether or not you take advantage of down payment assistance.
Closing Costs - Closing costs can include a variety of lender fees, escrow charges, title fees, insurance, and tax obligations, as well as Homeowners Association dues. At times, some of these closing costs may be covered by either the buyer or seller.
Remaining Savings - Homebuyers should be careful not to deplete their savings in their entirety when closing. It’s important to ensure you have enough funds set aside after closing for any unexpected repair bills or other financial emergencies that may arise. It’s common to plan for 6 months worth of reserves to cover unexpected emergencies.
What are Common Ongoing Monthly Expenses When Buying a Home?
Once you’ve covered your upfront costs, you’ll need to make sure you can comfortably pay your total monthly payments. Again, these ongoing monthly payments will encompass more than just your monthly mortgage payment and generally include:
Property Taxes - Property taxes vary significantly depending on city and state tax codes, as well as the value of your home. Additionally, while property taxes are typically only due quarterly or bi-annually, a portion of these dues is often lumped into your monthly mortgage payment.
PMI - Private Mortgage Insurance is usually required when buyers’ put down a down payment of less than 20%. PMI covers a portion of the outstanding mortgage balance to allow the lender to recoup funds in the event of a default.
Homeowners Insurance - The cost of Homeowners Insurance will vary depending on your geographical location, home value, and the age of your property. Homeowners insurance typically covers damage to the exterior and interior of your home, as well as lost or damaged personal assets and injuries that occur on your property.
HOA Dues - Not every home will have Homeowners Association fees, but with 62% of new homes belonging to an HOA, it’s a cost worth considering. Average HOA fees total $250/month for a single-family home.
Mortgage Payment - This is your monthly obligation to your mortgage lender. It will vary depending on the type of mortgage you choose but always includes your principal loan amount plus interest.
How Is My Monthly Mortgage Payment Determined?
Your monthly mortgage payment always includes your mortgage principal plus any relevant interest but may also require you to pay a portion of your property taxes or PMI. Your total monthly mortgage payment also depends on the type of mortgage you secure. This amount can then fluctuate depending on the terms (or lifetime) of your mortgage, whether you chose a fixed or adjustable-rate mortgage, or qualified for a government-insured mortgage. This is why it’s essential to review the five most common types of mortgages before signing any dotted lines.
How is My Private Mortgage Insurance (PMI) Payment Determined?
Private Mortgage Insurance isn’t always required when you buy a home. Homebuyers who put 20% or more down typically won’t be obligated to carry PMI. But if you plan on putting down less than the industry standard, you should prepare for a monthly PMI payment until you’ve built up at least 20% equity in your new home. PMI payments are calculated based on your total purchase price, down payment, credit score, and history.
Is PMI Different Than Homeowners Insurance?
Despite common misconceptions, Private Mortgage Insurance and Homeowners Insurance are different coverages that are billed separately. Therefore, homebuyers should plan for ongoing PMI and Homeowners Insurance payments when making their purchase –– not one or the other.
How Is My Property Tax Payment Determined?
Property taxes are an annual fee charged by local governments to provide and maintain community resources and infrastructure, including roads, schools, and essential services like police and fire departments. Property taxes are determined using the appraised value of your home and the county property tax rate.
This means property taxes can vary significantly, with expensive markets in popular areas like New York City and Los Angeles racking up higher taxes than houses in smaller, more rural areas with less community development and lower housing prices. To calculate your property tax rate, multiply the assessed value (which is different from the purchase or current market price of your home) by your local property tax rate. So, say for example you have a home with an assessed value of $250,000. Then, consider that in 2020, homeowners paid an average of 1.1% in property taxes. In this example, calculating your property tax obligation would look like this:
Assessed Value x Property Tax Rate = Annual Property Tax Obligation
$250,000 x 1.1% =$2,750.00
Do I Have to Pay Property Taxes Monthly or Yearly?
Exactly when and how often homeowners pay their property taxes depends on a few factors. While your home is still being paid off, your property taxes will typically be included in your monthly mortgage. Your lender will set aside your estimated property taxes in a separate account called an “escrow account”. Once your tax bill comes due, your lender will then transfer the money from the escrow account to pay your local governing body. It’s important to note these monthly payments are based on estimated taxes, so it’s never a bad idea to set aside additional funds to prepare for any outstanding obligations. But what if you’ve paid your home off? Unfortunately, finally paying off your mortgage won’t bring an end to property taxes.
Instead, homeowners that have paid off their mortgage will need to make property tax payments directly to their local tax office. Most of these payments will be due bi-annually, but some counties follow quarterly or monthly property tax payment schedules.
What Time of the Year Are Property Taxes Due?
The time of year your property taxes are due will depend on your local government’s tax code. Most counties adhere to bi-annual payment schedules, but others may stipulate property tax be paid monthly, quarterly, or annually.
Can I Claim Property Taxes on My Tax Return?
Yes, you can deduct property taxes from your federal income taxes. The IRS allows homeowners to write off up to $10,000 in property taxes thanks to the SALT tax deduction.
Need a Hand Covering Monthly Payments?
Buying a home is an increasingly expensive process that can leave the average homebuyer strapped for cash. If you’d like to avoid costly PMI payments, Noah’s Down Payment Assistance might be right for you. Noah can provide you with up to 75% of your down payment funds (up to 15% of the value of the home you’re purchasing) in exchange for a share of your home’s future value. By reaching the 20% down payment threshold, you can avoid PMI and even often qualify for lower mortgage rates. Or, use Noah’s Down Payment Assistance to make a larger down payment to reduce the size of the mortgage, meaning lower monthly mortgage payments. Learn more about how Down Payment Assistance works or see if you qualify.