What Can I Afford? A First-Time Buyer‘s Checklist
So you want to buy your first home, but what can you afford? Here are some basic budget items to help with your decisions.
The basic mortgage payment is made up of four things – Principle, Interest, Taxes and Insurance. Principle is just the amount of your payment that actually goes to paying off the mortgage. Interest is the amount you pay to borrow the money. Taxes are the amounts collected by your state, county, city and development to cover government provided services. Insurance is the amount you pay to insure your home against losses for fire, damage or theft.
There are several mortgage calculators available, I have one on the right side-bar of my home page. Use the calculator to figure the principle and interest part of your payment. If you borrow $400,000 to pay for your $500,000 home, then use $400,000 in the calculator. Interest rates change daily, sometimes hourly, but you can find current interest rates on the websites of most major banks. The interest rates posted are usually for borrowers with the highest credit scores. Taxes can be a little tricky as each state, county and city can add their own piece to the pot. In San Diego, I recommend buyers use 1.25% as their expected tax rate. Insurance is another one that is hard to estimate, but I recommend buyers check with the insurance company who handles their car insurance for help. Some insurance companies will offer discounts to people who have multiple policies with them.
I have many clients who hate the idea of paying for a Home Owner’s Association. Then they drive through neighborhoods and complexes who are clean, neat, well maintained and really like the setting. HOA’s can actually add to your home’s value by keeping your neighbors from growing knee-high weeds in their front lawns or, worse, turning their front yards into parking lots. Check out what the HOA pays for. It it includes stuff you need anyway, water, sewer, trash, roof maintenance, termites, it can be a bargain.
You need to keep the lights so electricity isn’t a choice. In San Diego, San Diego Gas and Electric has a 3-tier usage program. There is a basic tier that is pretty affordable. Tier 2 gets more expensive per kilowatt-hour used. Tier 3 is the most expensive rate per kilowatt-hour used. If you live in an apartment and it is just two of you, you can probably stay in the Tier 1 range pretty easily, but if you have a big house with a pool, 5 TV’s and kids on the computer all day, you can expect to pay for a lot of Tier 3 kilowatt-hours.
Water and Sewer
San Diego is in a desert. Most people forget that point when they see lots of green grass and gardens. Water is expensive in San Diego. I have a pool and my water bill runs about $80 per month and that is with a lot of conservation efforts. Sewer is part of the water bill in the City of San Diego. The combined bill comes out 6 times a year and is a 2 month bill. Budget accordingly
If you live in the City of San Diego, trash is free!! Who says you can’t get a deal these days. Cities other than San Diego often charge for trash and it is included with the Water/Sewer bill.
Cable TV and Internet
In San Diego, only one cable TV company serves a neighborhood. There are 4 major companies, but you only get to choose the one that serves your neighborhood. There are 2 satellite companies and AT&T offers U-Verse in limited areas. All of these options include some type of internet access. You can also choose on-line options like Hulu or Netflix for TV but you will still have to find Internet service somewhere.
So now that we have broken down all the parts of your new home, how much can you afford? Keep your PITI at 30% and Utilities at 3-4% of your budget and you will still have money left over for food, clothes, gas and all the other stuff you can’t live without.