Cost of home ownership
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949.769.1599 The OC Housing News provides detailed ownership cost calculations for every family home for sale on the local MLS.

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Publié le 04 septembre 2014
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Langue English
Poids de l'ouvrage 1 Mo


Cost to Own



































Guide to the real cost of
owning your home

COST OF HOME OWNERSHIP CosttoOwn
TheOCHousingNewsownershipcostcalculationsforfamilyhomes.................................................................3
Apoint-in-timeanalysis........................................................................................................3
AskingPrice................................3
DownPayment..........................................................................................................................................................3
MortgageInterestRate..........................................................................................................................................................................4
NumberofYears.......................4
Mortgage......................................4
IncomeRequirement..............................................................................................................................................................................5
MonthlyMortgagePayment5
PropertyTax...............................................................................................................................................................................................5
MelloRoos&SpecialTaxes..................................5
HomeownersInsurance........6
HOADues.....................................................................................................................................................................6
FHAMortgageInsurance.......................................6
MonthlyCashOutlays.............6
TaxSavings..................................................................................................................................................................6
PrincipalAmortization...........................................7
OpportunityCost......................................................................................................................................................7
MaintenanceandReserves...................................8
MonthlyOwnershipCost.......................................................................................................................................8
ComparableRental..................................................8
AddedCostor(Savings)........8
FurnishingandMoveIn.........................................................................................................................................9
ClosingCosts...............................................................................................9
DownPayment..........................................................................................................................9
TotalCashCosts........................9
EmergencyCashReserves.................................................................10
TotalSavingsNeeded...........................................................................................................10
HowMuchaHouseReallyCosts.....................................................................11
MortgagePayment................11
PropertyTaxes.......................................................................................................................12
HomeownersInsurance.....................................................................13
PrivateMortgageInsurance..............................13
SpecialTaxesandLevies....................................................................................................14
HomeownerAssociationDuesandFees.....................................................................14
MaintenanceandReplacementReserves...15
TaxSavings...............................................................................................................................15
HiddenSavings.......................................................................................16
OpportunityCost...................................................................................................................16
OwnershipCostMath..........................................................................17

info@ochousingnews.com 949.769.1599 CosttoOwn
TheOCHousingNewsownershipcostcalculationsforfamilyhomes
BelowisaconcisedescriptionofeachlineitemdisplayedontheMLSpropertydetails,whytheitemisimportant,
andhowit’scalculated.
APOINT-IN-TIMEANALYSIS
Todayisreality;tomorrowisafantasy.Theownershipcostcalculationisasnapshotofthecostofownershipatthe
timeoffirstpayment.Itmakesnoprojectionsforfuturechangessuchashomepriceappreciation.Thisanalysis
purposelydoesnotprojectfuturechangesfortworeasons:First,thecostsatthetimeoffirstpaymentare
concreteandknowable.Itrequiresfewerassumptionsandnocrystalball.Second,mostpeoplewhoestimate
futureappreciationwildlyoverestimate.Verysmallchangesinratesofappreciationmakeverylargedifferences
over10ormoreyears.Overestimatingappreciationalwaysmakesowningapropertylookverydesirable
financially.It’samistakemanypeoplemadewhoboughtatthepeakofthehousingbubble.
ASKINGPRICE
ThisisthecurrentaskingpriceontheMLS.
DOWNPAYMENT
Aconventionalloanrequiresadownpaymentthatis20%ofthepurchaseprice.Downpaymentswilllessthan20%
downrequireprivatemortgageinsurance,apolicypaidbytheborrowerthatprotectsthelenderfromloss.FHA
downpaymentsaregenerally3.5%ofthepurchaseprice.Thedownpaymentiscalculatedbymultiplyingthe
askingpriceby20%foraconventionalloanand3.5%foranFHAloan.
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MORTGAGEINTERESTRATE
MortgageInterestratesaresetbylenderscompetingtoofferloanstoborrowerswhoarebuyingorrefinancing
realestate.MortgageInterestRatesarequotedonmanywebsites,suchasBankrate.com.Iftheloanisoverthe
conforminglimit,ajumbopremiumof0.35%isaddedtothemarketrate.TheOCHousingNewscalculationsuses
theinterestrateprevailingwhenthelistingfirstcameonthemarket.Theinterestrateisperiodicallyupdated.The
mortgageinterestrateshownisnotaquote.Itisprovidedforestimatingpaymentsandcostofownership.
NUMBEROFYEARS
Thetermsofaloangenerallyrequirerepaymentovertime.Amortgagewithafixedrepaymentscheduleiscalled
anamortizingmortgage,andtheperiodoftimeoverwhichthemortgageamortizesiscalleditsterm.Thetermof
mortgagesisgenerally30years,but15yeartermsarealsocommon,andlendersofferotherschedules.TheOCHN
calculationsassumea30-yearfixed-rateamortizingmortgagebecauseitisastablebalancebetweenlowpayments
andreasonablerepaymentperiod,andit’sthemostcommonformofhomefinancing.
MORTGAGE
Themortgagebalanceforaconventionalmortgageistheaskingpriceminusthedownpayment.Themortgageis
80%ofthepurchasepriceinthesecalculations,butbuyersexecutingamove-upsalemayhavelargerdown
paymentsandsmallermortgagebalances.
TheFHAmortgageisnotassimpletocalculateasaconventionalmortgagebecausetheFHAchargesa1.75%up
frontfeethatgetsrolledintothemortgage.Theamountborrowedis96.5%ofthepurchaseprice(100%–3.5%)
plusthe1.75%charge,foratotalmortgagebalanceof98.25%ofthepurchaseprice(96.5%+1.75%).Thisiswhy
theFHAmortgageplusthedownpaymentdoesnotequaltheaskingprice.
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INCOMEREQUIREMENT
TheincomerequirementisbasedonstandardssetbyFannieMae,FreddieMac,andtheFederalHousing
Administration(GSEsandFHA).Themonthlycashoutlays(describedlater)multipliedby12givesayearlypayment
burden.Theyearlypaymentburdenmustnotexceed31%ofaborrowersincomeundermostcircumstances(FHA
oftenmakesexceptions).Theformulaisasfollows:IncomeRequirement=MonthlyCashOutlaysX12/0.31
MONTHLYMORTGAGEPAYMENT
Themonthlymortgagepaymentisdeterminedbylendersusingaformulaoutlinedbelow.It’sbasedonthe
mortgageamount,mortgageinterestrate,andloanterm(numberofyears)asdescribedabove.
Thefollowingformulaisusedtocalculatethefixedmonthlypayment(P)requiredtofullyamortizealoanofL
dollarsoveratermofnmonthsatamonthlyinterestrateofc.[Ifthequotedrateis6%,forexample,cis.06/12or
.005].
P=L[c(1+c)n]/[(1+c)n-1]
PROPERTYTAX
Proposition13setspropertytaxesinCaliforniaaresetat1%ofpurchaseprice(assumedaskingprice).
MELLOROOS&SPECIALTAXES
MelloRoosareanexampleofaspecialtaxlevyputonthepropertybythedeveloperinCalifornia.Thelocal
Assessor’sofficehasthisinformationonline,butitisnotorganizedinawaypermittingeasydownload,soitmust
beestimated.NoteverydevelopercreatesaMelloRoosdistrict,sosomepropertiesdevelopedsince1985may
havenoMelloRoos.Forthoseproperties,thecostofownershipcalculationswilloverstatethetruecost.
ThecalculationsontheOCHNestimateasfollows:
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Iftheyearofconstructionis2002orlater,MelloRoos=PropertyCostBasis×0.04.
Iftheyearofconstructionis1994orlaterbutearlierthan2002,MelloRoos=PropertyCostBasis×0.02.
Iftheyearofconstructionis1985orlaterbutearlierthan1994,MelloRoos=PropertyCostBasis×0.01.
HOMEOWNERSINSURANCE
Homeownersinsuranceratesvarywidely,butthestandardestimationis$25foreach$100,000inhomevalue.
HOADUES
TheHOAduesistakenstraightfromtheMLS.Sometimesagentsinputthisinformationincorrectly,butforthe
mostpart,thenumbersareaccurate.
FHAMORTGAGEINSURANCE
Conventionalmortgageswith20%downpaynoprivatemortgageinsurance.FHAinsuresmortgageswithaslittle
as3.5%down,andthecostofthisinsuranceis1.3%percentageoftheloanbalance—it’shigherthanproperty
taxesinCalifornia.
MONTHLYCASHOUTLAYS
Themonthlycashoutlays—alsoknownasPITI—isastandardlendercalculationofhousingcosts.Itisthesumof
thecostslistedabove:payment,propertytax,MelloRoos,Insurance,HOAs,andmortgageinsurance.
TAXSAVINGS
Thetaxsavingsisthemostcomplicatedofthecalculations.Basedontheincomerequirement,theborrowers
incomeiscomparedtobothFederalandCaliforniataxtablestodeterminethemarginaltaxratesforbothentities.
Todeterminethemaximumpotentialtaxsavings,themarginaltaxrate(bothFederalandState)ismultipliedby
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thesumofmortgageinterest,propertytaxes,andmortgageinsurance(thosearedeductibleexpenses).However,
tocalculatetheactualtaxsavingsthemarginaltaxratemustbemultipliedbythestandarddeduction,andthis
numbermustbesubtractedfromthemaximumpotentialtaxsavings.Thisadjustmentisnecessarybecausein
ordertoclaimthededuction,ataxfilermustitemize,andthisrequiressurrenderingthestandarddeduction.This
calculationissocomplexbecauseitmustberepeatedforbothStateandFederaltaxes,andbothhavedifferenttax
rates,differentincomethresholds,anddifferentstandarddeductions.
PRINCIPALAMORTIZATION
Sincepartofthemortgagepaymentisprincipal,andsincethisiseffectivelyaforcedsavingsaccount,theamount
ofprincipalamortizationmustbebackedoutbecauseitisnotatruecostofownership.
Thepaymentiscalculatedbytheformuladetailedabove.Theinterestonthedebtistheoutstandingloanbalance
multipliedbytheinterestrateanddividedby12.Theinterestissubtractedfromthepaymenttoascertain
principalamortization.Overtime,principalamortizationgrowsandmortgageinterestdeclines.However,since
thisisapoint-in-timeanalysis,onlytheamortizationofthefirstpaymentiscounted.
OPPORTUNITYCOST
Opportunitycostisperhapstheleastunderstoodoftheadjustmentstoownershipcost.Whenadownpaymentis
appliedtoahomepurchase,thatmoneycamefromsomewhere.Ifthebuyerwouldhavechosentorent,that
moneycouldhavebeeninvestedinanynumberofsafeinvestmentalternatives.Thelossofthisinvestment
incomeistheopportunitycost.
Thecalculationhereintakesthemortgageinterestrate,dividesitby3,thenadds1%toit.Thisgenerally
approximatestheyieldonmedium-termCDs,money-marketaccounts,orTreasuries.Forexample,at4.5%interest
rates,theopportunitycostwouldbe2.5%(4.5%/3+1%).
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MAINTENANCEANDRESERVES
Realpropertyrequiresroutinemaintenance.Further,overtime,moreexpensiveitemssuchasroofsorexterior
paintneedreplacement.Budgetingfortheirregularexpensesofroutinemaintenanceandtheslowdepletionof
wearandtearrequiresestablishingamonthlyallowanceformaintenanceandreplacementreserves.
Theformulausedhereisaskingpricetimesthree-tenthsofonepercentdividedbytwelve(0.003/12).
MONTHLYOWNERSHIPCOST
Themonthlyownershipcostisthemonthlycashoutlaysadjustedfortaxsavings,principalamortization,
opportunitycost,andmaintenancereserves.
COMPARABLERENTAL
Comparablerentalratesaredeterminedbyanadvancedalgorithmforselectingcomparableproperties.WhenI
wasactivelyflippingpropertiesinLasVegas,Ievaluatedbothresaleandrentalcompsonover1,500properties.I
developedaseriesofstepstograduallyloosenthevariousparametersuntilIobtainedasufficientnumberof
comparablepropertiestomakeareasonableestimateofvalue.Thesealgorithmsareproprietary.Asthisisan
automatedanalysis,thereisadegreeoferrorintheseestimates,andtheactualcomparablerentalratemaybe
significantlyhigherorlowerthantherateshown.
ADDEDCOSTOR(SAVINGS)
Thesavingsorlossisthemonthlyownershipcostminusthecostofacomparablerental.Ifthisnumberisnegative
(inparenthesis),thenthepropertycostslesstoownthattorent,whichisagoodsign.Ifthenumberispositive,it
costsmoretoownthantorent.
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FURNISHINGANDMOVEIN
Furnishingandmoveincostsvaryconsiderablydependingonthetastesofthebuyer.Therearegenerallyfixed
costsformoversandotherserviceproviders,andvariablecostsforfurnishings.Ingeneral,peoplewillfurnisha
houseinproportiontoitscost.Thefollowingformulaisalow-costestimate;mostpeoplewhenmovingintoa
familyhomewillspendmuchmore.
Theformulausedheretoestimateis1%oftheaskingpriceplus$3,500.
CLOSINGCOSTS
Thebuyerandselleroftensplitcertaincostsatclosing,andsomecostsareentirelytheresponsibilityofthebuyer.
What’spaidbythebuyerandwhatisasplitcostvariesbylocalcustom.Forfinancedpurchases,thebuyermust
payclosingcostsincludingloanoriginationfeesandotherlendercosts.
Theformulausedheretoestimateis1%oftheaskingpriceplus$3,500.
DOWNPAYMENT
Thedownpaymentiscalculatedabove.It’srepeatedherebecauseit’spartofthecalculationoftotalcashcosts.
TOTALCASHCOSTS
Thetotalcashcostsistheamountofmoneyabuyermusthaveavailabletocompletethesaleincludingfurnishing
andmovein,closingcosts,andthedownpayment.Peopleoftenforgetaboutclosingcostsandfurnishingcostand
gointodebtshortlyafterthesaletocoverthesecosts.
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EMERGENCYCASHRESERVES
Thoughnotanactualcostofacquiringtheproperty,financialadvisorsalwaysrecommendhavingsufficientcash
reservestocoverexpensesincaseofanemergency.Further,lendersoftenrequireliquidcashreservesinaddition
tothedownpaymentasaconditiontofunding.Mostborrowersdonotreservemuchifanythingwhenbuyinga
home.Almostnonehaveanadditionalsix-month’sincomelikemostfinancialadvisorsrecommend.
Thecalculationhereinonlyestimatesthreemonth’sofincomebasedontheincomerequirementgenerated
above.
TOTALSAVINGSNEEDED
Thetotalamountofsavingsnecessarytohaveastress-freepurchaseisthetotalcashcostsplussufficient
emergencyreserves.

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