If you’re thinking about buying a home in the not-too-distant future, it’s a good idea to understand the full scope of the costs involved. This will help you determine how much you can afford to spend on a house, and how much cash you’ll likely need to close the deal. Here are some home buying expenses to keep in mind, and some tips to start saving.
Besides the home’s selling price and the interest you’ll pay with a mortgage, you should consider the following costs:
• Closing Costs. Closing costs can range from 2% to 5% of a home’s total purchase price. They can vary depending on which mortgage and lender you choose. They often include expenses such as loan origination fees, home appraisal fees, recording fees, and title search fees.
• Homeowners Insurance. Before your mortgage is approved, your lender will require you to obtain homeowners insurance. You’ll need to either pay for it as a lump sum each year, or on a monthly basis as part of your mortgage payment.
• PMI. If your down payment is less than 20%, most lenders will also require you to take out Private Mortgage Insurance (PMI). Annual PMI costs are typically between 0.5% and 1% of your mortgage and are paid monthly as part of your mortgage payment.
• Property taxes. Many first-time home buyers forget to take property taxes into account when they’re determining how much home they can afford. Property taxes will vary based on your town’s tax rate, as well as the assessed value of your home. The higher the tax rate and your home’s assessed value, the more you’ll pay in property taxes. You should also keep in mind that property taxes can fluctuate year-to-year and your mortgage payments could increase in the future due to property tax hikes.
Here are some tips to help you save for a down payment, as well as your other home-related costs:
• Open a separate account. Opening a dedicated savings account for your home ownership goal can help you avoid the temptation to take money out of it. By keeping your “house fund” separate from your other bank accounts, you’ll have no reason to tap into it for ordinary expenses.
• Set up direct deposit. By automatically earmarking a portion of your paychecks to go directly into a savings account, you can resist the temptation to spend the money, and keep funds flowing into your account on a regular basis. Speak with your employer about how to set this up.
• Save any extra money. If you receive cash gifts, get a bonus, or are issued a tax refund, put it towards your home savings. Any extra funds you can stash away from time to time will help you reach your goal faster.
• Cut back on expenses. By reducing your monthly expenses, you can free up additional funds and save more. Examine your budget for costs that could be adding up over time, or for recurring subscriptions you could cancel.
• Save less in other areas. If you are currently putting money towards other savings goals or large expenses, you might consider temporarily reducing the amount you regularly set aside for them until you have saved enough to buy a home.
Buying a home can often seem out of reach, but if you understand the costs involved, put together a savings plan and budget, and stick to it, you can be well on your way to realizing your dream of home ownership. If you’re interested in buying a home and have questions about the mortgage process and costs, don’t hesitate to contact me today at www.bankfive.com/mikemendonca.