Teaching Members the True Cost of Buying a Home (Beyond the Mortgage Payment)

Originally published on CUInsight.com

While a traditional lender’s relationship with the buyer ends after closing, a credit union’s relationship spans decades.

That’s why educating members about the total cost of ownership (TCO), rather than solely focusing on the mortgage payment, is essential.

Simply shifting to a “monthly total housing cost” that consists of monthly P&I, estimated utilities, HOA, property taxes, homeowners’ insurance premiums, and a fully funded maintenance reserve at 1% to 2% of home value can do wonders.

The Monthly Payment Trap

The reality is that most professionals involved in the homebuying process anchor the conversation around one number: the monthly mortgage payment.

For example, lenders underwrite on principal and interest plus taxes and insurance. Real estate agents show properties that fit into a qualifying payment, and buyers place emphasis on their qualifying payment for days, weeks, or months.

The end result is a buyer who knows exactly how much they’ll owe each month on their mortgage from day one. However, nobody has any idea what they’ll pay in 12 months after property taxes adjust, insurance premiums rise, and their plumbing system breaks down.

Hidden Expenses Buyers Miss

“Maintenance and repairs are usually the biggest surprise for first-time buyers,” said Erin Hermany, SVP of consumer lending operations at Members 1st Federal Credit Union.

HVAC, plumbing repairs, appliance repairs, roof repairs, and everyday home upkeep are often ignored. Utilities, HOA fees, property taxes, and homeowners’ insurance can also create blind spots, as these expenses generally increase year after year.

“A good rule of thumb is to factor 3% of a home’s value to help cover them,” explained Hermany.

It’s not uncommon for buyers to change their minds once they look beyond the mortgage payment and consider these hidden costs.

If their monthly budget only allows for $3,000, for example, moving forward with a property that will actually cost $4,650 per month can lead to serious financial issues and even foreclosure down the road.

Why the Total Cost Conversation Needs to Happen Earlier

Ideally, credit unions would start the total cost conversation before the member even applies for a mortgage. A first-time homebuyer workshop or an initial sit-down consultation is the right moment, long before they’ve fallen in love with a house and committed emotionally.

An effective tool is a one-page breakdown showing what a specific home actually costs per month. The mortgage payment is on one line, then property taxes and insurance are listed separately with real dollar amounts.

A well-designed visualization of total cost over time is more effective than a generic pamphlet or verbal walk-through. When a member sees that a $2,100 mortgage payment is actually $3,200 a month, all in, for example, they start asking different questions about what they can afford.

The Credit Union Advantage

Fortunately, credit unions are well-positioned for this shift in affordability conversations because they’re focused on the member, not on closing as many loans as possible.

A mortgage broker processing 40 loans a month, on the other hand, has no incentive to slow down and walk someone through these numbers. A credit union loan officer who sees the same member at the branch has every reason to ensure the individual can afford the full cost of the home over 10 or 20 years.

“We focus on overall financial wellness. We do not center conversations around how much a member qualifies for. Instead, we look at all-in monthly housing costs, their ability to save and handle emergencies, and how they can enjoy life as a homeowner,” said Hermany.

The total cost conversation is just one piece of a much broader shift in how credit unions approach mortgage and member education. We’re continuing to explore these ideas, along with many others, and share what we’re seeing across the industry at acuma.org.

The information reported in this document, financial and otherwise, should not be construed as either legal or investment advice, nor does it represent the views of ACUMA, its Board of Directors, its staff or its members. The author presents information current at the time of publication and is designed to educate ACUMA members and others interested in the credit union mortgage lending industry.