If you are considering buying a house with HOA dues, you need to consider what those HOA dues really mean for you. There are three key points I like to address with my buyers- loan qualification, tax deductions, and home purchasing power.
- Loan qualification – when a lender is approving you for a loan – the amount of HOA dues are calculated along with the monthly payment for the housing ratio which should be around 35% of your total income. (This percentage varies depending on a number of factors but it averages around 35 %.) Your lender can tell you more about this.
- Tax deductions – HOA dues are not tax deductible like mortgage interest is so there is no benefit to you in that respect.
- Home purchasing power – (as I like to call it) Here I am referring to the extra dollar amount you can put towards the purchase of a home for the money you are spending on monthly HOA dues. This figure varies slightly depending on the interest rate you are paying. At a 5% interest rate loan, it calculates that for every $54 you spend in HOA dues is $10,000 more you can spend on the purchase price of a house. At a 5.5% interest rate loan, that number changes to every $57 you spend in HOA dues equaling $10,000 more house you can buy.
Here is an example of how that works at an interest rate of 5.5%:
Home A – $250,000 Purchase Price with 20% down = $200,000 loan, Monthly payment of PITI (principal, interest, taxes, and insurance) of $1495.99 + 200.00 HOA dues = $1695.99 Total Housing Payment per month
Home B – $285,000 Purchase Price with 20% down = $228,000 loan, Monthly payment of PITI (and no HOA dues) = $1,691.43 Total Housing Payment per month.
* Also remember the tax deduction factor you are losing each month on the $200 HOA dues verses $200 paid in interest instead.
If the HOA dues cover things such as water, garbage, cable, fitness center, pool, etc., there are at least some recoverable benefits to consider. The bottom line: Before you jump into that purchase that includes HOA dues think about what you are getting and what you are giving up.
DeeDee Riley - El Dorado Hills Realtor - Lyon Real Estate - CABRE#01499004
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