When Buying a Home; Look Beyond The Mortgage

By: Elaine E. Bedel - President , Bedel Financial Consulting

Buying a home is a better long-term financial strategy than renting a residence. However, before you buy be sure to consider all the costs involved in homeownership. The mortgage payment is only a part of your financial responsibility.

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It is easy to calculate the mortgage payment. With a little research, you can also determine the property tax and the estimated homeowner insurance premiums. What is forgotten by many buyers is the cost for immediate repairs, replacement of appliances, and the increased maintenance costs. Especially for first time homebuyers, before you commit to the home of your dreams, be sure to consider your total financial obligation.

Home Inspection

Prior to purchasing a home, participate in the home inspection. The cost of an inspection is generally $150 to $500. It will be worth the time and money to be sure that you have a complete understanding of the condition of the house. You will receive a written inspection report, but you should also take good notes.

The inspection will include items that relate to the integrity of the structure, such as the foundation, framing, and electrical system. If a major issue that was previously unknown is uncovered in these areas, you will want to reconsider whether to purchase the home or, at least, reduce the offering price to compensate for the defects.

The inspection will also include a thorough analysis of the items that require periodic maintenance, such as the roof, exterior siding, plumbing, heating systems, storm drainage, etc. The report will indicate the age and remaining life of the items as well as reveal any items that need immediate repair. The cost of items that need immediate repair should be considered in the price negotiations with the seller. More importantly, this area of the inspection can provide insight as to your future financial obligations. This information will help you determine whether the house is really affordable.

In addition to the structural and periodic maintenance items, the inspection will also point out the condition of interior surfaces such as the flooring, counter tops, and interior wall coverings and paint. Since these items are cosmetic in nature, you can plan these expenditures over time.

How Much Will It Cost?

From the inspection report and your notes, you should have a good idea of what you will need to replace and a timetable. You can create your own schedule for the next one to five years and begin setting aside funds in the "House Maintenance" account each year to meet the costs. For example, if you determine that the roof will need to be replaced in four years and the anticipated cost is $4,800, then you should set aside $1,200 each year ($100 per month) to meet this expense.

Budget for Maintenance

As a general rule, you should plan on spending 1% of the value of your house (excluding the value of the land) for maintenance each year. For example, if you pay $300,000 and the lot is worth $50,000, you should reserve $2,500 per year (1% of $250,000). This amount should be increased each year to reflect inflation. Any unspent funds should be accumulated in your "House Maintenance" account to prevent a sudden financial burden when the maintenance or replacement is due. This reserve fund will also make it possible to do the repairs as needed instead of delaying them. All the research shows that it is important to take care of the problem immediately and not delay. Delaying almost always increases the ultimate cost.

Summary

The mortgage, with property tax and homeowners insurance included, and the annual maintenance are a large portion of the costs to own a home. But don't forget to consider the monthly utilities and the immediate purchases that you will need to make, such as a lawnmower, snow shovel/blower, and furniture.

Do your research and plan your budget. Make sure the home you are purchasing is both physically comfortable and financially affordable.

Elaine E. Bedel, CFP�, is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email ebedel@bedelfinancial.com.

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