How Much Home Can You Afford?

May 5, 2018

Common monthly expenses incurred by home owners.
I have worked with so many clients over the years who’s entire decision on the size of the home they are purchasing is on their realtor’s prequalification calculation. Your realtor is always going to prequalify you for the largest purchase prices he or she can. In purchasing a home, you need to start with a clear idea of what your budget can afford. If you are already paying $2,000 a month in rent, and it is comfortable, that should be a fairly good indication that $2,000 a month is a number to shoot for.

But, principal and interest payments are just part of the monthly and ongoing costs of home ownership. We’ll cover some of the additional expenses most homeowners deal with below.


Property tax rates are collected as a percentage of your county’s assessment of your property value and the percentage varies by county, so the effect on your monthly responsibility depends on where you are looking to live. Hawaii has the distinction of having the lowest average property tax rate in the nation at 0.32% of assessed property value. Before you pack your bags, though, realize that Hawaii’s average home value is $784,583 (2017) which make means the average homeowner pays $2,511 a year or $209 a month in property taxes.

New Jersey homeowners pay the highest percentage rate at 2.31% tax on the 8th highest average assessed home value of $367,036 (2017) for a total of $8,479 per year or a whopping $707 a month added to your monthly payment, which makes New Jersey by far the worst state for property taxes.

Other States with high a high average monthly tax bill include New York at $584 per month, Connecticut at $581 per month, New Hampshire at $495 per month, and Massachusetts at $459 per month.

State with the lowest average monthly tax bill include Alabama at $65 per month, West Virginia at $71 per month, Tennessee at $82 per month, Arkansas at $84 per month, and Kentucky at $102 per month.

The overall average, nationwide, is a monthly tax bill of $248 a month.

Homeowner’s Insurance

If you have a mortgage, you will need to maintain a homeowner’s insurance policy to cover the cost of repairs or destruction of your home due to manmade or natural disaster. If you don’t have a mortgage, you still need a homeowner’s insurance policy.

The rate that you pay is based on the risk of loss in your area and many additional factors including the age and building materials of your home, your home’s value, your claims history, your credit rating and your chosen deductible. Like car insurance choosing a higher deductible will lower your cost, but make sure you can cover it in an emergency.

Nationwide, the average cost of homeowner’s insurance is $614 per $100,000 of coverage per year or $51 a month. Hawaii has the lowest average homeowner’s insurance cost at $169 per $100,000 of coverage, but with the highest average home value, it’s cost per family is $1,322 per year or $110 a month.

The state with the highest average cost is Florida at $1,788 per $100,000 of coverage. Adjusted for Florida’s average home value, families in Florida pay $4,980 a year or $415 a month in homeowner’s insurance.

If the home you are purchasing is a condo or town home, your homeowner’s insurance is generally covered by your monthly association fees. You’ll still want to get a condo owner’s policy to cover the contents, but the building is generally covered by your Homeowner’s Association.

Flood Insurance

Damage to your home caused by water that originates from a natural disaster such as a flood, tsunami or hurricane is not actually covered by your normal home owner’s insurance. If you live in an area that is prone to these types of events, it’s a good idea to purchase flood insurance. In fact, only 20% of homes at risk for this type of damage are covered – likely because many homeowners think that floods are covered by their existing homeowners policies.

Flood insurance policies are issued by many major insurance companies, and are generally backed by the Federal government under the National Flood Insurance Program run by FEMA. Like homeowner’s insurance, the cost varies based on the location of your home and the area’s risk of flooding. Nationally, the average cost is $700 a year, or about $59 a month for $250,000 of protection for your dwelling and $100,000 for it’s contents.

Maintenance and repair

One of the risks of purchasing a home is the need to incur the costs associated with things going wrong. Costs could be as simple as needing to hire someone to take care of the yard, to tens of thousands of dollars to repair plumbing or fix the roof. There is no way to estimate the costs other that to make sure you order a professional home inspection before you commit to a final purchase. If you are buying a fixer upper, realize that remodeling and repairs are almost always more expensive that you initially estimate.

Association Fees and Dues

If you are looking to purchase a townhome or condo, you will most likely be incurring HOA fees or Homeowner’s Association fees. These fees generally cover the costs of common areas such as the common roads and driveways, pool and recreation areas, and the exterior of the building in the case of condominiums. Nationwide, costs average between $200 to $400 a month, but it really depends on the type of building and the number of amenities provided and it’s not always a bad deal. Groundskeepers can be expensive and many associations cover homeowner’s insurance for the buildings and water, sewer, and garbage pickup fees which you would probably have to pay separately if you purchase a traditional detached home.


Even renters have to pay for utilities, but keep in mind, if you are purchasing your first home, electricity and water costs are typically higher that you expect when you are moving from a condo into a home. For the purposes of this article, it’s impossible to estimate costs, but make sure you estimate monthly bills or electricity, water & sewer, garbage, Television and Internet, gas, or any other services unique to your area.

So how much can I afford?

Add up all of the estimated costs from each item above, and now you know what homeownership should cost you. Work with a real estate agent to come up with the correct guesses on each monthly expense.

How much you can afford really depends on your lifestyle and what percentage of your household income you can commit to monthly housing payments. Historically, the finance profession has advised their clients to keep housing costs below 30% of gross income. With housing prices rising and salaries stagnant over decades, this is no longer realistic.

Bottom line, add up the estimated monthly costs. If it is more than you are currently spending on rent, write out a budget to determine what you can cut out. If there is nothing you can cut, then you can’t purchase a home yet, or you will need to search for something less expensive.