Emotionally, you feel ready for home ownership. Then, you look at your financials and credit score, and you think you can swing it. There is more than the monthly mortgage payment to consider, though. Buyers need to be aware of the total cost of ownership prior to taking the plunge.
Principal & Interest
Most people consider this monthly payment during the planning stages. It should also come up when you start discussions with your real estate agent and with your lender. There are plenty of online calculators to assist you with this task. Your monthly principal and interest on a $600,000 property, based on a 3.875% interest rate on a 30-year mortgage, assuming 20% down, is $2,257. Remember, you can either pay your closing costs up front when your purchase is finalized, or roll it into the purchase price. If you choose the latter, remember to include this amount into your mortgage calculation.
Generally, if you itemize your deductions, you can deduct mortgage interest from your taxes. Keep an eye on the current tax debate as it unfolds this fall, since there are rumors this could be eliminated.
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Property Taxes & Insurance
You also have to factor in property taxes (for a condo) and homeowner’s insurance. You can elect to include these in your monthly mortgage payment, or set aside funds to pay for them when due. Class 2 tax rates are used for co-ops and condos (as well rentals with more than four units). Property taxes are also currently tax deductible for those that itemize. Some sources state average annual homeowner’s insurance premiums are about $1,200-$1,300.
If you do not place a minimum 20% down payment, lenders require you to purchase private mortgage insurance (PMI), which typically range from 0.5% to 1.5% of the original loan balance. Once you cross the 20% threshold, you no longer pay PMI.
A co-op owner pays a monthly maintenance fee, while it is called a common charge for those choosing condo living. These can range from a few hundred dollars to several thousand. This depends on the size and location of your unit and the cost to run the building, among other things, such as the amenities provided.
Condo fees are typically lower, but generally, cover less since you are responsible for the maintenance inside your unit. A co-op’s maintenance fee typically includes property tax with your individual share calculated based on the number of shares you own. The building may have a mortgage, and that is included.
You should factor in inflation since operating costs tend to go up over time. It is also wise to check the building’s financials to ensure there is an adequate reserve fund for major repairs. Otherwise, you could find yourself paying a large special assessment.
There are a couple of rules of thumb when it comes to budgeting for repairs, which applies to condo owners. The first one states annual repairs runs 1% of the purchase price over time while the second states advise setting aside $1 per square foot every year.
Utilities may be covered in your maintenance fee, but, you should be prepared to pay separately if you live in a condo. If you are buying a larger apartment than your current rental, count on paying more.