Financially Planning The Purchase Of Your New Home
Buying a home is a massive financial undertaking. For a smooth and successful purchase, you need to plan all the financial aspects of buying a home properly, and it starts with determining your budget and identifying your wants and needs.
Most of the steps pertain to financing/buying with a mortgage, but even if you are buying with cash, it’s important to set a budget and stick to it.
Some of the most important facets of financial planning associated with buying a new home are:
Down Payment
If you are planning on buying a home with a mortgage, the first thing you have to do is save for the down payment. If you can, invest 20% of the value of the home you are planning on purchasing, you will have access to the widest range of commercial mortgages and wouldn’t need to pay for Private Mortgage Insurance (PMI).
You will also start with 20% equity in your home right away. But if you can’t afford to put that much down as a down payment, look into FHA mortgages. They only require a 3.5% down payment from qualifying applicants. So you may be able to purchase a $500,000 home with just $17,500 in downpayment. The downside is PMI. Also, if your credit score is relatively low, you may not qualify for a 3.5% down payment from an FHA mortgage. With a lower credit score you would need a 10% down payment for an FHA mortgage.
If you can put down more than 20%, it will make you a stronger candidate in the eyes of the lenders and will also reduce the size of your monthly mortgage payments.
Mortgage
There are several types of mortgages available in the US, but most people choose conventional mortgages funded by the banks themselves. These mortgages come with relatively stringent requirements and are influenced by several market and individual factors. Including interest rates, appraised value etc.
Locking in at the same rate for 20 to 30 years can make paying off your home predictable. Consider an Adjustable Rate Mortgage (ARM) if you want to minimize your initial expenses or you don’t expect to stay in the home for longer than the initial lock in period. It provides a defined rate for a specific period, after which it adjusts based on a predetermined formula .Other factors influencing your mortgage are your credit score, income, and current debt. A high credit score can get you a good interest rate. A low credit score may land you a lower interest rate, and runs the risk of rejection from lenders.
Your income will also decide how much you can borrow. This is because of the debt-to-income ratio lenders take into account when reviewing your application.
Debt-to-Income Ratio
Banks use a debt-to-income (DTI) ratio to evaluate applicants. If you owe money from credit cards, auto loans, personal loans, or student loans, the bank wants to make sure you can handle the additional debt from a mortgage. Lenders check to see that your housing costs are less than 28% of your total income and total debt doesn’t exceed 36% of your income. There is some flexibility in this based on your history of total income vs your monthly expenses.
Affordability
Your affordability is determined by more than just your DTI ratio. You should have a clear idea of a monthly mortgage payment you can afford now and in the long run.
Any additional expense, like a new baby, a child going to college, or loss of income, can significantly impact your mortgage affordability. So consider all these factors before determining your budget for purchasing a property.
Closing Costs
When buying a home with a mortgage, some expenses can be added to the loan. Yet, it’s crucial to have sufficient savings to cover extra costs such as attorney fees and insurance. These are expenses that are not included in the mortgage. Make sure you know the different types of closing costs you will be expected to cover and how much you should set aside for them.
Moving
While it isn’t required to hire movers, sometimes their expertise is useful. The average cost of movers for a local move to a 2-3 bedroom house with 7,500 pounds of furniture and personal belongings is $1,250. This depends on what state you are in, how far you are moving, and what moving services you have chosen. However, the costs associated with moving are more than just about paying movers. Sometimes you may need to purchase other items like curtains/blinds, new fixtures, and deep cleaning.
Renovations/Repairs
It’s recommended that you do not plan extensive renovations for your new home for at least the first few weeks of moving in. It will give you enough time to get used to the place and figure out if you would really benefit from the renovations. But if you know you will need to make a few repairs. You can negotiate with your seller to make most of the major repairs before closing or leave money in the escrow for them, but it’s not always an option.
Ownership Expenses
When transitioning to homeownership, it’s important to consider the expenses involved. While some costs are foreseeable, such as insurance and taxes, there are additional maintenance expenses to account for. The extent of these expenses depends on the type of property you own.
For condominium owners, maintenance expenses are typically limited to the interior of the unit. However, if you own a single-family home or a townhouse, you are responsible for maintaining the entire structure. You may be able to reduce these costs by handling certain tasks yourself.By carefully planning your finances when purchasing a new home, you can protect yourself from unpleasant surprises and avoid costly mistakes while owning your own space.
