ousing expense is the amount you will have to pay to actually live in the house you buy. It includes the mortgage principal and interest payments, property taxes, and home owner's insurance premium.

Most buyers never figure their own housing expense, and so it comes as a bit of a shock when their loan payment coupons show up and the number is a lot larger than the simple principal and interest amount.

Property taxes and hazard insurance
While most areas of the US bill property taxes in either one annual or two half-yearly lump sums, if your down payment is less than 20% of the purchase price, many lenders will impose your property taxes and basic hazard insurance charges through an impound account.

Property taxes are decided by your local government. They are typically 1% to 2% of the home value per year.

Home owner's insurance costs depend on where you live and on how much coverage you get. For a rough estimate, assume that it will cost you 0.15% of the home value per year.

Other expenses
If you buy a home in a condominium or PUD, you will also have monthly fees (often called Home Owner's Association dues) to cover the costs of maintaining the common areas.

While the bank doesn't include them in their calculation, remember that as a home owner you will have an annual maintenance cost of approximately 1% of the purchase price.

The lender's perspective
Typically, the lender sets a limit of 28% of your gross income (pretax) for housing expense. It's not so much that they like to participate in your budgeting, but they get nervous that you won't make your mortgage payments if your housing expense is above their limit.