Before purchasing my first home, I simulated the cost of home ownership. A renter at the time, I put the extra pretend mortgage expense into a savings account for my down payment. I decided to do a test run again before making my next home purchase. According to a recent article by MSN Real Estate that cited a Redfin report, the sales of the most expensive homes in the country are up 21 percent this year, while sales of the other 99 percent less expensive homes are down 7.6 percent.
As a person who owns a starter home but wants to purchase a nicer home, I’m going to have that added challenge. I may have to compete with other sellers to unload my starter home while also competing with buyers to purchase a new construction home. Since new home inventory is tight in my Florida community, I may also need to add in costs such as renting an apartment while waiting for my new home to be built if I’m fortunate enough to sell my current home for its asking price. For my test run, I need to figure out all the costs of new homeownership and decide whether it’s worth the tradeoffs.
Determining my budget
One of the great things about a test run is I can decide whether I want to stretch myself to afford the home I want or shop for a home based on a pre-determined budget. I rather find the home of my dreams, figure out the cost, and then discover if I’m financially equipped to handle what I want. I found a home I want for $300,000 in a master-planned community. So there won’t be any surprises, I identified an “inventory” home that already includes all the upgrades. I also researched the property taxes, homeowner association fees, and CDD or community development district fees.
Comparing the old and the new
My old mortgage is $925 a month, which doesn’t include homeowner’s association fees. With everything including utilities, my housing costs are $1,200 a month. I used a Zillow mortgage calculator to determine my new housing budget. I’m planning to put 20 percent down or $60,000 so that my mortgage amount is $240,000. My bank said I could get an interest rate of 4.24 percent, but that could rise so I’m estimating it at 4.5 percent. The new homeowner dues and CDD fees would amount to about $166 a month. Home insurance is $2,100 a year. Our new payment would be $1,857 with an additional $150 for utilities for a total of $2,007 a month. I estimated a smaller utility bill since the builder advertises energy efficiency and lower cooling costs.
Considering the tradeoffs
In order to afford my dream home, I have to spend an extra $800 each month on housing costs. I’ll also have to extend my mortgage payoff from 13 to 30 years, since I only have 13 years left on my current mortgage. At the same time, I should net an extra $40,000 from the home sale in addition to the down payment amount. If I invested the money and earned 6 percent, I’d have $2,400 in one year or about $200 a month. Therefore, I am considering my added expense to be just $600 a month. To save $600 a month, I gave up only things I would not mind giving up forever. I am not willing to increase my work hours in order to make the extra $600 a month.
In the end, I found it too difficult to save $600 a month for a new home purchase. I plan to save about half as much each month to put toward a new home fund. If my investments really do provide a decent return, I’ll be able to more easily afford a step-up home without having to live on beans and rice in a big beautiful home that I can’t afford.
More from this contributor:
Tighter Mortgage Rules Will Affect Me
Pre-Paying my Mortgage Now So I Can Retire Early
Buying a Modest Home We Could Pay off Early