Living the American Dream
by Bernhard Krieg
Right now you are in the middle of planning your wedding, or you are about to get married. The next big decision for the two of you is whether you should rent or buy a place you will call home. While experts debate the pros and cons of buying a home at this time, you’re both faced with the challenge of securing a home that allows you the freedom to live and enjoy your life together. At some point you’ll need to figure out how much you can really afford to spend on a house without unnecessary stress and tight restrictions on your financial life.
The True Cost of Buying a Home
Why throw your money away for rent every month when you can buy a similar place for only a few hundred dollars extra every month in a mortgage payment? There are many factors to consider when purchasing a home. First of all there is the down payment. If you are only able to provide a small amount for your down payment, your interest rate and monthly payment will be considerably higher than with a larger down payment. You will also be required to purchase private mortgage insurance (PMI) with down payments of less than 20% of the entire purchase price.
Real estate taxes in Chicago run at about 1-1.25% of current market values per year. This is an expense that will continue to increase at rates significantly above the rate of inflation. Condos are attractive alternatives to entry-level homeowners, both in the city and in the suburbs of Chicago. While they are typically available at lower prices and require less maintenance, monthly assessments can be a substantial amount. This is particularly true for old buildings, such as lofts or high amenity buildings.
New homeowners often underestimate the costs for repairs and maintenance of their house or condo. As you create your budget, I suggest that you calculate about $150 per month for a single family home and $50 for a condo where the association payment covers exterior maintenance. You probably won’t spend this amount each month, but you’ll have a fund to draw from for items that will need to be repaired or replaced.
Closing costs can also add to the purchase price of any home. These costs are not limited to the fees and potential points you are paying to your mortgage lender, but also include city tax (0.75% of purchase price within Chicago), title fees, and professional fees to lawyers or inspectors if you choose to use their services. All of these things add up to monthly cash needs that are 45-55% higher than the mortgage payment alone. (See below for a detailed example.)
After you’ve signed your name on the dotted line, you’ll need to have some money left over for moving costs and home furnishings. In addition to furniture, your list might include blinds, lamps, outdoor furniture, plants, BBQ grill etc. I would suggest that you take your time on those purchases rather than running up your credit card or incurring additional consumer debt. Yes, anything that offers an easy payment plan with no money down is another example of consumer debt.
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