Buying a home is a big deal, one that comes with an equally big cost. When preparing your finances to buy a home, the first step is to determine what your expected monthly mortgage payment will be. But that’s just the start. As a buyer, you’ll also need to consider other expenses that come with buying a home.
To ensure you’re financially prepared for homeownership, here’s some information that will help you understand the financial obligations that come with a home purchase so you can make the best decisions for your unique situation.
Select a Home You Can Afford
When searching for your first home stick to those properties that you can afford, meaning those homes that are within your price range based on your income. Buying a more expensive home than what you qualify for may leave you living paycheck to paycheck, with no wiggle room for financial emergencies or discretionary spending.
While the monthly mortgage payment is a large expense, there are other recurring costs to consider when buying a home. Those include utilities such as electricity, water, internet, as well as home insurance, food, home maintenance and Homeowner’s Association fees (if they apply). All of these things add up each month, which is why it’s important to buy a home you can afford.
Budgeting For a Home
- Follow the 28 percent Rule: This method can help you decide what is affordable based on your income. The 28 percent rule dictates that your mortgage should not be more than 28 percent of your gross monthly income. Do the math and see what you can afford at 28 percent of your monthly income. Keep in mind that lenders look at your debt-to-income ratio to help determine the interest rate you will pay to finance your home.
- Save for a larger down payment: Saving for a larger down payment can help lower your monthly mortgage payment. The down payment is a percentage of the purchase price of your home that you pay upfront during escrow. Traditionally, the down payment amount has been around 20 percent but today there are various types of mortgages that allow for a lower down payment, or even no down payment, in the case of VA Loans.
If you are providing less than 20 percent for a down payment, your lender will require Private Mortgage Insurance (PMI) to protect the loan in case you stop making mortgage payments. This additional cost is added to the mortgage, creating a higher monthly payment. PMI is removed once the property has at least 20 percent available equity.
If you don’t have enough for the full 20 percent, looking for home loans that require less is a smart move. Shop for mortgages that allow you to do 10 percent or five percent down payment. If you’ve served in the U.S. Armed Forces, the VA Loan is a loan program with zero down payment.
- Buy a starter home: If you are a new home buyer and you are looking for the best path to own, buying a starter home can be the key. Starter homes are typically condominiums, townhouses or older single-family homes because they tend to be smaller in size and are not as expensive as new developments. Be aware that some condominiums and townhouses may have additional fees such as a Homeowners Association (HOA).
- Appliances: Buying a home may require buying appliances and other items. If the potential home already has appliances, negotiate for them as part of your sales contract. You will save money upfront by not having to buy a new refrigerator, washer, dryer, or other appliance, and you can always upgrade later.
If appliances were not included as part of your home purchase, you will have the joy of picking out new ones and the pain of their purchase prices. New appliances are expensive; try not to get into debt by financing them so soon after closing on your home. Instead of new appliances, consider buying used or refurbished, or shop around for the best deals.
- Upkeep and Maintenance: Wear and tear on your home is inevitable. The cost associated with expected and unexpected home repairs may catch a new homeowner by surprise. You can plan for the unavoidable expenses by sticking to a budget and building emergency savings.
Travis Can Help
Your path toward homeownership does not have to be traveled alone. TCU can help! We will explain the entire mortgage process and get you pre-qualified for a home loan. Our mortgage loan consultants can provide you with various loan options so you can buy a home you can afford.
If you are already a homeowner, TCU also offers competitive rates on refinances, has Home Equity Loans and Home Equity Lines of Credit available that can help you with improving or renovating your property. You can also use these for other major expenses such as a wedding, consolidating debt and more.