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Course: Financial Literacy > Unit 14
Lesson 1: Renting vs homeownership- Renting versus buying a home
- Advantages and disadvantages of owning vs renting
- Owning vs renting
- The true cost of renting a place
- Requirements for renting or buying a home
- Things to consider when renting a home
- Renting requirements
- Things to know before buying a home
- Buying requirements
- Requirements for renting and buying a home
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Things to know before buying a home
If you are thinking of buying a home, remember to consider the full range of costs involved beyond the mortgage payment, including property taxes, homeowner's insurance, and homeowners association (HOA) fees. Including these expenses in your budget is crucial to ensure you can afford the overall cost of homeownership. Created by Sal Khan.
Video transcript
- [Instructor] Let's say you're
interested in buying a home and you have found the house that you want and it costs $300,000. Let's think about whether you
are ready to purchase that and other things that you
might have to consider. So, a lot of folks realize
that if you wanna get a loan to buy this house, most banks aren't going to give you the full amount as a loan. There might be some special circumstances depending on your background, depending on whether you are a
veteran, or things like that. But in most cases, banks are going to expect you
to put a 20% down payment. And that protects the bank in case the value of that
property goes up or down, or especially if it goes down. And also it makes you
invested in the property so that you don't just walk away. So, if we take 20% of $300,000, that is going to be $60,000 that you're going to have
to put as a down payment. Now, you might say, "Okay, is that the cash that I need to save in order to buy the house?" And my answer to you is
it is almost the cash that you need to save to buy that house because when you buy a house, there's also something
called closing costs. And depending where you are, some of the closing
costs might be paid for by the seller, sometimes it is the buyer. You are the buyer in this situation. But you could reasonably expect, and some of the closing costs are all of the legal and the
paperwork that you have to do when you buy a house. Sometimes there are costs associated with the mortgage itself, but it's reasonable to assume that that's going to be another 2-5% of the purchase price of the house. So, once again, let's say, let's be a
little conservative here, let's take the 5%. If we took 5% of $300,000, that's another $15,000. Hopefully, it would be less than that, but let's be conservative. So, in this situation, you are going to be looking at a total of $75,000 at least, well, depending on what we
assume about the closing costs, but around this that you
would have to come up with in order to feel good about going through
the entire transaction. But we aren't done with our considerations because it's not just
about the amount of money that you can bring as a down payment, it's also what can you afford
in terms of a mortgage. And as we'll see, there are other monthly
costs other than a mortgage. So, if you have 60,000 down, this means that you're
going to have to borrow, borrow the remainder, $240,000. And I recommend you going
to a mortgage calculator, and I looked it up right over here. If we're borrowing $240,000 30-year fixed mortgage
at this interest rate, interest rates are constantly changing so look it up wherever you are, this is a monthly payment of $1,742. And even to get this mortgage, it's not just that a bank will say, "Oh, you have the money, I'm
gonna give it to you," they're going to do things
like a credit check. They are going to verify your employment. And not just that your employed, but how much money you
are actually making. And as a general rule of thumb, they're going to wanna see
that your housing costs are no more than 30% of your gross income. And by the way, that's a
pretty good rule for yourself so that you don't overspend,
you don't break your budget. So, they're the more your income relative to how much you're
gonna have to pay every month, the better it's going to look when a bank considers
whether to give you a loan. Now, I keep saying housing
costs as opposed to mortgage because the mortgage is part of it, but there are other things that you're going to have to
consider when you buy a house. First of all, there's
gonna be property taxes. Property taxes can be significant. Depending where you live, they can be anywhere, 1, 2, 3% of the value of the house every year. So, if we were to go with,
say, 2% property taxes in this example, and I encourage you to look
it up wherever you are, 2% of the value of the
house and it'll go up if the value of the house
goes up, in most places, that's going to be $6,000 a year, 6,000 per year, which is another $500 a month. So, now our total monthly costs are 1,742 plus $500. And we are not done. You, if this is a condominium or even if it's a house in a development, sometimes there's a
homeowner's association and they charge for the grounds upkeeping, the gardening, if there's a shared pool, sometimes it includes things
like some of the utilities, or picking up the trash, or
other types of maintenance. So, that could easily be, depending on the size of the house, where you live, et cetera, it could be anywhere from 4, or 5, $600, sometimes a lot more than that. But let's throw another
$500 right over here. Let's remind ourselves what this is. This is the mortgage. This over here was property tax. This over here is the
homeowner's association. There's other costs. If you don't put 20% down, some lenders force you to get
private mortgage insurance, so and you could pay
that on a regular basis. Sometimes all of this could
be rolled into the loan and it all gets rolled into your mortgage, but you're going to pay
it one way or another. And so, you even add up all of this, you are at 2,742. And even this does not factor in all of your housing costs because above and beyond this, you might have to pay
for your own gardening, your own upkeep. Things are always breaking, you have to replace appliances, every 15, 20 years you
have to replace a roof. You should ask around and figure out what you're
likely to spend there and factor all of that in. And let's say once you
factor all of that in, your total costs are, say, $3,000. Based on these numbers, it would probably even be
a little bit more than that when you factor in utilities and upkeep and maintenance
and broken appliances and other types of, say,
homeowners insurance that you might need. But let's say that all of that stuff when you factor in is
about $3,000 a month. Then, if we go to that 30% rule of thumb that you shouldn't spend more than 30% of your gross income on housing costs, that would imply that
you need a gross income of at least $10,000 a month or $120,000 a year. Once again, that's not
a hard and fast rule, but the bank is probably going to look for something like that as well. But it gives you a sense of what you're likely to afford, and it's good to go into buying a house, everyone dreams of owning a house, and it's not a bad dream, but it's very important to go
into it with eyes wide open.