The Real Cost Of A House Payment: Why Your Customers Need To Know It
The true cost of a house payment goes beyond what the initial lending company quotes. Home insurance customers find that out after a few years of living and caring for a house, but at first it’s not that clear. As an insurance agent dealing with first-time homebuyers you’re in a unique position to prepare your clients for the challenges ahead, even when those challenges are indirectly tied to their insurance policy.
So just what is the real cost of a house payment, and why is it not as cut-and-dry as what the customer is initially quoted?
First of all, there are home insurance premiums. These are usually worked in to the loan amount, so the customer will consider it a part of the normal payment even though it is a separate entity. Home insurance is a necessity, and it helps to protect customers against the catastrophic losses that Mother Nature or human error can cause. Your customers know this, but they may be too liberal when it comes to filing claims. If something goes wrong with the home, for instance, that could be handled out-of-pocket, some may rush to file a claim when it would actually be wiser to financially prepare.
To do that, a customer needs to know around how much they can expect to spend on home repairs and maintenance throughout the life of the mortgage. Financial experts suggest the following scenarios:
*$1 per square foot annually: Under this method of saving for repairs and maintenance, a homeowner would take the heated square footage of their home — let’s say it’s a 2,000SF home — and they would multiply that times $1 for the yearly total that they would need to save up in order to handle things out-of-pocket, thus saving homeowners insurance for catastrophic losses. The math is pretty simple. It would be $2,000 per year or around $166.67 per month.
*1% of the purchase price annually: In this scenario, let’s say that 2,000SF home cost around $250,000. Doing the math, that would work out to a total of $2,500 per year that a homeowner would be wise to save in order to handle required maintenance and repairs ($208.33 per month).
*The happy medium: This method of saving for the cost of repairs and maintenance involves taking the two annual numbers listed above — $2,000 and $2,500 — adding them together and dividing by two for a grand total of $2,250 (or $187.50 per month).
*Weather losses and other factors: To guard against small claims brought on by weather and unexpected losses, experts also suggest taking whichever computation suits the homeowner’s fancy — we’ll use $2,250 — and adding around 30 percent. In this case it would be $2,925 (or $243.75 per month). This final number is what a customer should consider adding to their final payment, provided things like home insurance, mortgage insurance, and any other fees are already worked in to the number the lending company quoted.
What homeowners must know upfront is that even if they get through a year without losses or need for repair, it’s impossible to own a home for 15 or 30 years and not have need to maintain it. The portions and percentages above account for that lag.
Filing claims for smaller losses that could be handled with a little better financial planning could jeopardize a homeowner’s coverage, so it’s important they know what their real payment is ahead of time and that they plan for the unforeseen. It may mean buying less house, but it’s better less house they can afford than too much that they can’t. Feel free to share this information with any client, who is thinking of buying a house in the next few months.