Budgeting, Cash Flow, Home Ownership
Buying a home comes with a huge financial stake, a lot of responsibility, and even more fine print. While investing in this aspect of the American dream is exciting, it’s important to reflect on your current and future plans before buying. Here are five questions to consider:
1. What Are Your Goals for the Next 5 to 7 Years?
Are you happy with your job and feeling content with how your life is going? Do you anticipate any career, family, or financial changes in the next few years?
If you’re considering growing your family or changing careers, factor into your budget any anticipated changes, such as extra room for a baby or an income cut. That’s better than taking a financial loss by having to turn around and sell your new property.
2. What Will It Cost to Both Purchase and Own Your New Property?
A general rule of thumb is to keep your PITI (principal, interest, taxes, and insurance) costs below 28% of your gross monthly income, while your overall debt-to-income ratio should be no more than 36%.
Are you buying a bigger space than what you currently have? Don’t forget to factor in increased heating and cooling costs. Also, plan for homeowner’s association dues if applicable.
In addition to the funds you have for your down payment, don’t overlook the following expenses you’ll incur once you purchase your home:
- Moving costs
- Closing costs
- Home repairs
- Painting
- New appliances
- Fixtures
- Furniture
I recommend opening a separate savings account in addition to your down payment fund to save for these expenses.
3. What’s Your Credit Score?
Your credit score is your financial report card, except it will follow you long after college. This number can either save or cost you thousands of dollars when it comes to locking in an interest rate on your mortgage. The lower your score, the higher your interest rate and the more you’ll pay to borrow from a lender. The higher your credit score, the lower your interest and the more money you’ll keep in your pocket.
If you have any issues on your credit report, tackle them as soon as possible.
4. How Will You Handle Home Repairs and Maintenance?
Is there a lawn to mow or a pool to clean? Do you enjoy the idea of tinkering with appliances and fixing things around the house? Consider if you’ll DIY or delegate. If you’re a delegator, price services ahead of time to ensure there’s room in your budget.
One of the first things I told my husband upon seeing our new backyard was that I don’t do landscaping. Apparently, neither does he, because 12 months in, we have a monthly line item in our budget for a gardener.
5. How Will Your Ideal Location Affect Your Monthly Nut?
It’s important to consider more than just the home price in your desired community. Will you be farther from or closer to work? How will your home’s location affect your commuting costs? Our family purchased in a community that has a toll road, so we’ve added tolls to the monthly budget.
In addition to transportation costs, consider whether your food and utility costs will increase or decrease, and whether you’ll enroll kids in the local school district or opt for private schooling.
This post was written in partnership with The National Association of Realtors. I have been compensated, but the thoughts and ideas are my own. For additional home finance tips, check out HouseLogic.com.
Home Ownership
With your focus on building your down payment fund and figuring out what your mortgage payment will be, it’s easy to overlook some of the smaller fees that come along with a home purchase. Here are eight and what they could cost you.
1. Home Inspection
A home inspection helps protect you from purchasing a home that could be a lemon. So you don’t want to forgo it. Inspectors will look for signs of structural issues, mold, and leaks; assess the condition of the roof, gutters, water heater, heating and cooling system; and more. Inspections cost between $300 and $500, and whether or not you end up purchasing the property, you still need to pay this fee.
2. Appraisal Fee
This appraisal report goes to your lender to assure it that the property is worth what you’re paying for it. This report worked in our favor a couple of years ago when our home came back appraised for $10,000 less than our bid; the sellers had to reduce their asking price in order to move forward. An appraisal can costs between a few hundred to several thousand dollars depending upon the complexity.
3. Application Fees
Before ever approving you for a loan, the lender is going to run your credit report and charge you an application fee, often lumping the credit report fee in with the application fee. This can run $75 to $300. Be sure to ask for a breakdown of the application fees to understand all costs.
4. Title Services
These fees cover a title search of the public records for the property you’re buying, notary fees for the person witnessing your signature on documents, government filing fees, and more. These can cost between $150 and $400, and it’s important to get a line item for each cost.
5. Lender’s Origination Fees
Your lender will charge you this upfront free for making the mortgage loan. This includes processing the loan application, underwriting the loan (researching whether to approve you), and funding the loan. These fees are quoted as a percentage of the total loan you’re taking out and generally range between 0.5 to 1.5%.
6. Survey Costs
This report ($150 to $400) confirms the property’s boundaries, outlining its major features and dimensions.
7. Private Mortgage Insurance (PMI)
When you put down less than 20% on your new home, the lender requires that you purchase PMI, which is a policy that protects the lender from losing money if you end up in foreclosure. So PMI is a policy that you have to buy to protect the lender from you. PMI rates can vary from 0.3% to 1.5% of your original loan amount annually.
8. Tax Service Fee
This is the cost (about $50) to ensure that all property tax payments are up to date and that the payments you make are appropriately credited to the right home.
Always ask questions when it comes to understanding the fees you’re paying. If possible, print out documents and go through them with a highlighter to indicate any areas you have concerns about. Discuss them with your lender or real estate agent and determine if you can negotiate any of them down.
Don’t be afraid to price shop to ensure you’re getting the best value. Just because you’re spending hundreds of thousands on a home doesn’t mean you should be comfortable throwing thousands of dollars at fees.
This post was written in partnership with The National Association of Realtors. I have been compensated, but the thoughts and ideas are my own. For additional home finance tips, check out HouseLogic.com
