You don’t need to be in real estate to understand the importance of buying a new home. It is undoubtedly the biggest financial purchase you will ever make. You never want to be in your home only a few months to figure out that you may be in over your head. At that point the only options you have are generally bad ones. Fortunately, with just a little financial planning and foresight you can get in a home, and a payment, you are comfortable with. Here are the four most important financial items to consider before you start your new home search.
Monthly Payment. There is a huge difference in what you may be preapproved for and what you can actually afford. If you have minimal debt and decent credit your preapproval amount can offer surprise you, for the better. That being said, it doesn’t mean you should start your search at that number. You always want to start with a projected monthly payment number in mind first. Your monthly payment will include your mortgage principal and interest in addition to your taxes, insurance and possibly private mortgage insurance depending on the down payment amount. The annual tax and homeowner’s insurance amount may change annually, but generally speaking this is what your payment will be for as long as you are in the home. You should never have to rely on overtime or stretch your budget thin to make your payment. You may be able to get into a larger home, but you will be miserable trying to make the payment. Always start with a monthly payment number in mind and work backwards from there.
Down Payment.In recent years there has been a growing number of reduced down payment mortgage programs. Even with that, the general minimum you can find is 3% of the purchase price. What is important to keep in mind is that in addition to your down payment you also need money for prepaid tax & insurance as well as other closing costs. Your new lender will pay your property taxes in advance, so you will never see a tax bill again. But, they also hold a cushion in the event taxes rises. On a purchase, they can hold anywhere from four to eight months of your tax payment in escrow. Additionally, you also need to pay a year of homeowner’s insurance in advance as well. There are seller and lender credits and concessions you may be able to use to offset these amounts, but when you budget you should factor having to come up these additional funds.
Housing Expenses.If you have never owned a home before you may be shocked at what it takes to run a household. In addition to the mortgage payment, you also need to account for couches, beds, silverware, lawnmowers and everything else needed to live in a home. You don’t necessarily need to get them all at once, but eventually you will have to have them. Depending on your style this can tack on thousands to your budget and often come in areas you never expected.
Living Expenses. There is a big difference in splitting rent with a roommate and being solely responsible to run a house. Owning a home in some respects is a lot like having children, in that you never really know what to expect until it happens. You may think you are prepared, but you can never be certain. As with housing expenses, there are a handful of expenses need to run a home. You have payments for utilities, cable, water, electricity, oil and other town specific items. This is not even factoring in food, entertainment and technology. All of these must be considered in your total housing payment.
There is little question as to the financial benefit of home ownership. Not only can you enjoy sizable tax benefits, but you can realize equity for the right property down the road. Just make sure you know exactly what you are getting into before you make an offer, so you can enjoy your home worry free.