How Much Money Do You Really Need to Buy a House in Vermont?
Your first home purchase will be one of the bigger events of your life. Often, your home purchase is the result of several factors that are both emotional and practical. It’s a commitment to your chosen hometown or to where you grew up if you decided not to relocate. Feeling confident enough to buy a home also often means that you have your finances on solid footing and that you don’t have an excessive amount of debt from credit cards and student loans holding you back from your dreams. If you have just gotten married, or are starting a family with your partner, then each of you has visions about how you would like your lives to unfold, and having the right house, in your preferred place, is central to that vision.
As a community bank, Union Bank is always investing in those who want to live in and contribute to our community. So, let’s examine the financial implications of owning a home, which in fact inform every step of the housing search, even before you sign on the dotted line at closing. The details below will help you have a solid understanding of the average monthly cost of homeownership as your journey begins.
Buying a home locally
For most people (particularly those who aren’t purchasing fixer uppers or houses with specific expensive issues that require immediate remedy), the mortgage will be the largest monthly expense associated with a house. But what about one-time up-front costs as well as the ongoing costs that you may not have incurred if you rented? Here’s a closer look.
There are closing costs related to the loan that your bank underwrites for your mortgage. These include the following:
- Escrow withholdings: Most banks offer what is known as an escrow service where they increase your monthly loan payment by an amount that is sufficient to allow the bank to pay your property taxes and insurance premiums for you on their respective due dates. Your escrow withholdings will be unique to your situation, but we’ll use a $225,000 house in Morrisville, VT as an example. Vermont happens to be one of the least expensive states in America for homeowner’s insurance costs, with an average cost of $582. This is for a house that is roughly along the lines of the type of house our hypothetical Morrisville couple would be searching for. More expensive houses naturally have more expensive insurance costs. Your first month’s escrow withholding is generally paid as part of the closing costs. Once you start paying your mortgage loan the escrow amount is included in your required monthly payment and adjusted when your property tax or insurance costs increase, requiring increased escrow withholding.
- Title: Charges related to title insurance both for the bank (to ensure that the ownership is free of any liens and encumbrances—for example, the bank wants to make sure that a utility company, a secondary mortgage from a refinancing, or other entity that has a claim to the house is cleared before moving forward with writing a mortgage), and for you. These are separate charges, but generally cost about $200.
- Credit Report: Credit reports generally cost about $75. Your credit report has a considerable influence on if you can obtain a loan and on how favorable terms of your eventual loan will be. Many banks won’t underwrite a loan for someone with a credit score that’s below a certain level (640-680 or so), though Federal Housing Administration (FHA) loans can often be taken out in these cases. Among its wide variety of loan products, Union Bank does underwrite FHA loans.
- Appraisal: The buyers of a property typically pay the cost of evaluating the property and its fair market value through a formal appraisal. The purpose of the appraisal report is to ensure that the individual purchasing the home is not spending too much on the property, and thus taking out a mortgage that is higher than the value of the home. These fees can range from $250 to $500 or more, but most will be in the $350-$450 range.
- Loan origination fees: Loan origination fees for most banks are generally 0.5-1% of the total amount of the loan, although some of these fees can be waived with the charging of a higher interest rate.
In general, average closing costs in Vermont will range from about 2% to 3% of the total loan/value of the house, although the percentage will be lower with higher priced homes since certain costs (ie, appraisals and credit reports) don’t vary much in price regardless of the type of home you are buying.
Down payment costs
For a house around the median price in Morrisville (between $200,000 and $250,000), the 20% down payment required to avoid private mortgage insurance (which protects the bank in case you default on your loan) is $20,000-$25,000. However, many people are not able to put down that much money. So how much down payment do you need?
Private mortgage insurance is required if you do not put down 20% except with specific types of loans. For example, Union Bank offers an Economic Opportunity Mortgage for which you might not always need PMI, even with a lower down payment. It depends on the loan-to-value of the loan—that is, the amount of the loan you are taking out versus the appraised value of the house, with a loan-to-value of 80% indicating that the loan is 80% of the home’s total value. PMI usually costs between 0.5% and 1% of the total amount of the home’s value, but this is the amount you’ll pay annually until it’s not necessary anymore–for example, when the outstanding mortgage loan value drops below 80% of the appraised value of the property. So, you could end up paying quite a bit more than 1% of the home’s value in PMI.
Putting down at least 20% of the sales price will lower the total amount of money you need to borrow and save you the expense and hassle of private mortgage insurance. But prospective homeowners who don’t have a 20% down payment saved should not be discouraged. There are plenty of ways to buy a home with a lower down payment.
Owning a home in VT & NH
These days most home searches start online. Sites like Realtor.com, Zillow and Trulia are remarkable for their ease of use: you enter your Zip code or town of interest and are able to sort the searches using a wide variety of filters including number of bedrooms, home characteristics (you can select, for instance, whether you want a garage, a home with a pool, or a house that’s more or less than 50 years old). If you’re enterprising, and would like an apartment to rent out along with your main living space, you can also set these filters to show you only multi-unit buildings.
Realty sites also have some of the financial information you need to decide what price range to focus on. Let’s return to our hypothetical Morrisville couple and give them a joint income of $57,500 a year. With a price range of between 3-4 times yearly income (assuming no or minimal debt and a 20% down payment), they should search for a list price of between $172,500 and $230,000. That aligns well with the median house price of $225,000. The total town property tax rate is about $ .83 per $100 of assessed value, which (at less than 1% of assessed value) is low and will lead to having a lower total monthly payment than you would have if your property taxes were higher.
Assuming a mortgage on a $225,000 property that is assessed at full value when you buy it (note that many properties have assessments that are lower than their purchase prices, but we’ll be conservative here), with 20% down and the above tax rate, the basic cost of your mortgage would be as follows with an interest rate of 4%, 30-year-fixed (we’ll talk about the different types of mortgages available to you below):
- Property tax: $1867 (divide by 12 and the tax is $155.58 a month)
- Cost of borrowing $180,000 a year: $859.35
- Total monthly cost of the basic loan: $1014.93
Union Bank’s online mortgage calculators enable you to start figuring out this part of the mortgage process, known as “pre-qualification.” Just enter some financial information (your gross monthly income, which is your annual income before taxes and withholding divided by 12; your monthly debt from things such as car payments and credit cards; and other fixed expenses), and you’ll receive a general conservative and aggressive price range to guide you in your search. Better yet, contact one of our skilled mortgage lenders to discuss your specific circumstances and what loan programs would best meet your needs.
While the mortgage is perhaps the major item that determines your monthly housing costs, there are many other factors that contribute to the total expense of your home. Let’s take an in-depth look at these factors, many of which first-time home buyers aren’t aware of.
Average monthly costs of home ownership
Homeowner association fees: Two type of fees exist for homeowner and condominium associations. Typically fees for common charges might be about $200 to $300 a month. However, there could be additional special assessments for major investments could increase these fees.
- Two potential examples: a planned community of homes with a homeowners association may be responsible for plowing its own snow in the winter, or for road maintenance within the community proper.
The association raises the money to pay for this via an assessment beyond the typical $200 to $300 monthly.
- The amount of these assessments can vary widely depending on the nature of the assessment.
- A condominium building that requires extensive maintenance to something like its roof or its heating system could easily have a special assessment that runs over $1,000. Others could be lower.
Notably, these fees vary, as most things related to home prices do, according to the size of your property and where it is, with larger properties tending to have greater association fees than smaller in a condominium association, and homes in more expensive areas tending to have more expensive homeowner association fees.
Sewer/trash pickup: The price for these items will generally be less than $50 a month; many communities have low cost trash drop-offs. Village residents often pay water and sewer fees together.
Utilities: When renters become homeowners they are often surprised by the cost of utilities; a large, stand-alone home with our long cold winters can have heating costs that easily are greater than $400 or $500 a month. Mortgage lenders generally don’t factor this into their lending decisions, so it is important that you do when considering a home purchase.
How to use this information to compare the costs between communities
Once you’ve located a few different places where you might be interested in purchasing a house, it’s good to create a checklist so you have a point at which it’s possible to compare costs. Some elements of this checklist might include the following:
- Which of these communities has higher or lower property taxes? What benefit am I receiving from these taxes?
- Does this property belong to a homeowner’s association? Are the fees worth what I am receiving?
- Is this an older or a newer house? (older houses tend to have higher utility costs as well as costs associated with renovations that aren’t usually necessary in newer houses)
- If you’re buying a condo, what do the maintenance costs cover? What types of renovations are you responsible for if, for instance, a water pipe that serves the entire building bursts behind your wall? This is just one of many potential scenarios.
- Is it worth it to choose a less-expensive house tailored to our needs if we can avoid having to pay PMI?
The main idea behind having a checklist is that you want to avoid paying substantially more for one house versus another if (to you) the more expensive house does not provide tangible benefits that the less expensive house doesn’t.
Put yourself on the path to home ownership today.
When it’s time to apply for a mortgage, you want more than a lender. Union Bank is your local partner in the mortgage qualification and home buying process. We can help you find the right type of mortgage and educate you on the entire sequence of events and requirements so you’re completely prepared to buy a home. Contact us today to get started.