How to Prepare Your Budget Before Buying a Home
After jumping through all the hoops of becoming a homeowner, reaching the finish line with keys in hand can feel like quite an accomplishment. But while it’s certainly worthy of a celebration, the financial heavy lifting doesn’t stop there.
With the freedom of homeownership comes more responsibility — and often a bigger price tag — than renting. Even if you’re a seasoned homeowner, the numbers attached to a new home might not be exactly what you’re used to.
That’s why you should prepare your budget before signing on the dotted line, so you can make the transition as seamless as possible.
Determine What’s Coming In and What’s Going Out
It’s virtually impossible to know what size home you can afford if you aren’t fully aware of how much is coming in and how much is going out each month.
Start with your income: How much do you bring home after taxes and retirement plan contributions?
Next, look at your expenses: What are your necessary expenses? How much are you paying each month towards your debt? What additional expenses do you have that wouldn’t be deemed “necessary?” How much money do you have left (if any)?
This will help you see how much breathing room is in your current budget, what expenses might be on the chopping block, and the space you have for additional home and mortgage expenses.
Consider the Potential Costs of Being a Homeowner
While rent payments are generally straightforward and predictable, the same can’t always be said for homeownership costs. Your situation can vary depending on a variety of factors, but here are a few things you might need to prepare your budget for.
Property taxes: The amount you pay will depend on the area in which you are purchasing a home. This amount can be subject to annual adjustment by the taxing authority. Any adjustment is most typically an increase.
Homeowner’s insurance: Lenders will require you to provide proof of coverage before closing. The amount will depend on your level of coverage. Insurance costs also increase from time to time.
Private Mortgage Insurance (PMI) or Mortgage Insurance Premiums (MIP): If your down payment is less than 20% on a conventional mortgage, your lender will require you to carry private mortgage insurance. If you have an FHA loan, you’ll be required to pay mortgage insurance premiums throughout the life of the loan.
(See how Unison can help increase the size of your down payment and eliminate the need for private mortgage insurance.)
Homeowner’s association fees: Fortunately, not all homes have a homeowner’s association to pay into. Purchasing a home with HOA-covered amenities could cost, on average, an additional $200-$400 per month.
Maintenance fees: Ah, the pitfalls of being a homeowner. The costs that would normally fall to a landlord, like fixing broken plumbing or a heater on the fritz, will now fall on your shoulders. Some suggest saving one percent of your home’s value annually for maintenance.
Utility costs: Unless your rent included the cost of utilities, this is probably already an expense you’re used to. However, if you’re moving into a bigger home with less energy efficient appliances, you should be prepared to see an uptick.
Use a mortgage calculator to help break down what your total monthly costs might look like.
Start Living Like a Homeowner
If you want to avoid experiencing sticker shock after your home purchase is complete, start living like a homeowner now.
Consider your current rental or homeownership costs and compare them to the costs for a home in your target price point. Can your current budget handle the difference? Are you still able to pay for your necessities plus shore up your financial future through short and long-term savings? Or do you find yourself feeling desperate by the end of the month?
Not only will this allow you to get used to the change before the stakes are higher, but it can also help you save more money to put towards unexpected costs for your future home purchase.
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Determine Where to Make Adjustments
Does living like a homeowner make you a little wary for what’s next? Now is the perfect time to create space in your budget by cutting back expenses and paying down debt.
Now that you know where your money is going, determine the unnecessary leaks. Maybe your monthly food bill is exorbitantly high. Or maybe your subscription services have gotten out of hand. If your priority is purchasing a home — and being financially comfortable in that home — work to cut expenses that are contradictory to that goal.
Next, tackle your debt. There are two big benefits to beefing up your debt repayments now: You can lower your monthly obligation and improve your chances of getting approved for a loan. It’s a win-win.
Breathe a Little Easier
It’s easy to have tunnel vision during the home-buying process and think only about getting that new set of keys. But in order to stay financially stable and mentally sane after the loan paperwork is signed, preparing your budget beforehand is key. Five years, ten years, twenty years down the line, you’ll be so glad you did.