Buying a home is going to be one of the biggest investments of your life! And, unless you are a millionaire, you will need to plan a budget for buying your first home.
When you decide to buy your first home, the costs you will have on your mind will probably be those related to closing and down payment. And, of course, those related to the mortgage you will have to pay every month for the next thirty or maybe even fifty years. But, unfortunately, that is not all. You mustn’t forget about insurance, moving, home remodeling, etc. To have a stress-free homebuying experience, you must think about all the upcoming costs.
This guide will help you plan a budget for buying your first home. So, give it a read. We are sure that it will help you understand and plan for all buying, owning, and maintaining costs.
Decide How Much You Can Actually Spend on a Home
First things first, before you start buying a home, decide how much of it you can actually afford. To (roughly) decide that – start by multiplying your annual income, and gross income, by 2.5. This will show you how much money you have to work with.
However, when buying a home, besides your income, you should also consider the following three things:
- Your Credit Score – If you have a higher credit score, you will have better mortgage options. And, vice versa.
- Mortgage Rates – If you want an affordable home, you should always opt for lower mortgage rates.
- All the Home-Related Costs – Don’t forget about the costs such as moving, remodeling, redecorating, etc.
If you are not sure how to plan a budget for buying your first home, or if you are not sure how to calculate your mortgage rates or interests, consider talking to an expert. For instance, you can go to a financial advisor, a bank representative, or a mortgage lender
Set Aside Money for a Downpayment
To figure out how much money you have to set aside for your downpayment, you will have to take a look at your credit history, and more importantly, at your mortgage type. These two things will decide whether you will have to pay 3% or 20% of the purchase price of the home you are buying.
However, have in mind that if your downpayment is lower than 20%, you will have to get private mortgage insurance (PMI) which you will have to pay for until you reach that 20%. But, there is a way around this! Namely, if you save some money when buying a house, that is, before buying a house, you can use that money to pay for a larger downpayment and avoid monthly PMI payments.
And, Set Aside Money for Closing Costs
If there is one thing professional movers such as those from Spyder Moving can advise you on it is that you shouldn’t rush with moving into a home that is not yet ready for you. Wait until all the closing costs are paid for first. However, there are still people who believe that after signing a contract, everything is done. It is not! You still have to pay for an appraisal fee, credit report fee, tax services fee, your lender’s origination fee, and government recording charges.
All these closing costs vary – they range from 1% to 5% of the purchase price. So, just to give you an example, if you spend $200,000 on a home, your closing costs will be anywhere from $2,000 and $10,000.
Account for New and Ongoing Expenses
If you want to plan a budget for buying your first home, just as previously mentioned, you have to consider all the additional expenses. It is difficult to pinpoint all those expenses (as all homes, situations, and people are different), but there are always some that you should be ready for.
For instance, depending on your situation, you should be ready for the following costs:
- Moving into your new home
- Inspecting your new home
- Remodeling and redecorating your new home
- Buying new furniture, appliances, and décor
Then, once you are all moved into your new home, whether that be a house or an apartment, you should be ready to pay the following:
- Mortgage
- Interest
- Taxes
- Insurance
- Escrow payments
- HOA fees
Moreover, when buying a home you need to include a lot of people on your team – from realtors and movers to mortgage lenders and handymen. All of these will come with their own service prices. Thus, be prepared for that too.
Let us just give you another piece of advice – just because buying a home is expensive, don’t try to cut corners on all the people you have to hire and their services. Trust us, there is a good reason why some home inspectors (or some movers, or some roof contractors, etc.) cost more than other.
Calculate Your Budget
According to majority of lenders, you shouldn’t spend more than 28% of your income (gross monthly income) on your mortgage payments. And, you shouldn’t spend more than 37% of your income on your total debt (student loans, car loans, credit cards, etc.).
Moreover, don’t forget to include all your current and future living expenses – these are just as necessary as any other costs. So, consider the following:
- Food
- Bills
- Healthcare
- Childcare
- Petcare
- Education
- Transportation
- Apparel
- Entertainment
Besides all of these, you should always plan to set aside money for emergencies each month. You never know when something bad is going to happen (job loss, illness, unexpected emergency, etc.), so it is best to be prepared and have some money on the side that can serve as your financial cushion.
If you want to plan a budget for buying your first home, you should take into consideration all the costs mentioned above. Living the American dream is not easy, but, according to everybody living it, it is worth it. So, before buying anything, cost out your dream!
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