Buying a new home can be one of the most exciting—and anxiety-ridden—moments of your life. Credit scores, mortgage rates, and pre-approval documents are all on your mind. You also stress over potential out-of-pocket expenses, such as broken home systems and appliances, once you’ve made the purchase. But by finding out the best home warranty company, you can protect yourself against these unexpected maintenance and repair costs. Also, by arming yourself with the right information, you can make the entire home buying process less daunting.
How Much Can You Afford?
The first thing to do before purchasing a house is to decide on how much you can afford. Start your budget by determining how much you earn each month, including all revenue streams. Then, figure out your estimated housing costs as well as your total down payment. Factor in your homeowners’ insurance, annual property tax, projected mortgage interest rate, and how long you want to pay off your mortgage. A lot of people opt for a 30-year loan term, while others choose shorter loan terms.
Finally, tally up all of your total monthly expenses. These are all the money that goes out every month. Ensure that you’re accurate about how much you can spend. This is a huge factor in deciding how much you can reasonably afford to buy a new home.
Preparing Your Budget
All homebuyers must prepare for the complete costs required for the purchase. Otherwise, you risk flipping your monthly expense budget on its head. Here are the costs that are a part of buying a new home:
- Down Payment. This refers to the portion of the home’s purchase price you have to pay upfront. For instance, if you’re buying a $300,000 home and put $30,000 down or 10% of the purchase price, you’d be getting a mortgage for $270,000. How much you pay for a conventional loan depends on the lender and the type of loan. You might put down as little as 3%, 10%, 20%, or even more.
- Mortgage Payment. Unless you’re able to buy your new home in cash, you’ve got to deal with a mortgage payment every month. Numerous factors contribute to the total amount you’ll have to pay for your mortgage. These include the principal amount, interest, property tax, homeowners’ insurance, private mortgage insurance (if your down payment is less than 20 percent of the purchase price), and HOA fees. When adding up the expenses of owning a home, keep in mind that your mortgage payment is just the tip of the iceberg.
- Closing Costs. On closing day, expect to owe fees to different parties, such as the seller, lender, and appraiser, among others. To get the keys to your property, you will have to pay closing costs. This refers to all of the charges associated with the mortgage. Closing costs generally range between two to five percent of the principal loan. These often include fees for application, appraisal, credit report, notary, underwriting, state recording, inspection, land survey, title insurance, title search, homeowners’ association (HOA), and transfer tax, if applicable. Note that the actual cost generally varies depending on the value of your home and the partners you work with. Not all of these fees also always apply, as they vary from state to state.
Why You Need to Set Aside an Emergency Fund
The true cost of homeownership involves a multitude of extra expenses that go beyond your monthly mortgage payments. Property taxes, HOA or condominium fees, and homeowners’ insurance are routine and unavoidable.
But some expenses are occasional and unpredictable, which can potentially add to the stress. These are the upkeep and repairs of a leaky roof and several home systems. The list includes the plumbing, electrical, and heating, ventilation, and air-conditioning (HVAC) systems. You may even have to deal with termites and mold. Whether you hire a professional or handle the yard work yourself, you also need to allot for landscaping and lawn care. Being ready for these hidden costs is only half the battle. It’s best to set aside an emergency fund to cover unexpected expenses.
When first-time home buyers shop for their new place, they usually have unrealistically high expectations of how much they can afford to spend. This is largely due to them not being fully aware of all the expenses. No one wants to end up with a mortgage that they can’t pay. So, ensure that you’re realistic about your monthly income and estimated expenses. It’s best to leave some breathing room in your budget for unexpected costs and emergencies that may crop up.