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Emotionally, you feel ready for homeownership. Then, you look at your financials and credit score and 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 before 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 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 pay your closing costs upfront when your purchase is finalized or roll it into the purchase price. If you choose the latter, remember to include this amount in your mortgage calculation.
Generally, you can deduct mortgage interest from your taxes if you itemize your deductions. Keep an eye on the current tax debate since rumors could be eliminated as it unfolds this fall.
Property Taxes & Insurance
You also must 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 (and rentals with more than four units). Property taxes are also currently tax-deductible for those that itemize. Some sources state the 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), typically from 0.5% to 1.5% of the original loan balance. Once you cross the 20% threshold, you no longer pay PMI.
Maintenance/Common chargesMaintenance/Common charges
A co-op owner pays a monthly maintenance fee while common charges for those choosing condo living. This depends on your unit’s size and location and the cost to run the building, among other things, such as the amenities provided. These can range from a few hundred dollars to several thousand.
Condo fees are typically lower but generally cover less since you are responsible for maintaining your unit. A co-op’s maintenance fee typically includes property tax, with your 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. It is also wise to check the building’s financials to ensure adequate reserve funds for major repairs. Otherwise, you could find yourself paying a sizeable individual assessment.
There are a couple of rules of thumb regarding budgeting for repairs, which apply to condo owners. The first state’s annual repairs run 1% of the purchase price over time, while the second states advise setting aside $1 per square foot every year.
Closing thoughtsClosing thoughts
Utilities may be included in your maintenance fee, but you should be, prepared to pay them separately if you live in a condo. Suppose you buy a larger apartment than your current rental, count on spending more.