How To Afford A House
Thinking about buying a house? If you are, it’s probably going to be the biggest purchase of your entire life, and truth be told, any small mistake you make during this process might end up costing you much larger in the long run.
This is why the most important thing to do is figure out how much you can actually afford – this should be one of the first major steps when it comes to the homebuying process. There are many associated costs that come with purchasing a piece of property, and especially one that you are going to be calling “home sweet home” for the long-term.
Chances are, you probably already have a savings account labeled “down payment” that you religiously set aside a portion of your paycheck every month into. However, it is worth noting that that’s not the only cash you’ll need before you receive the keys to your home – there are many other considerations that are essential for you to know about when it comes to financing your biggest purchase yet. Here are some examples below.
Associated costs of buying a house
There are several associated costs that come with buying your first house – meaning it’s not just the downpayment that you have to worry about.
- Mortgage rates
Picture this: you’re driving past a really nice neighborhood and you see a dream home that really catches your eye. You stop the car, take a briefcase filled with cash out from your trunk, and walk right up to the front door, making an offer to buy the place from the owner on the spot.
Now back to reality: Most would-be homeowners would never experience this kind of scenario, and you’d be hard pressed to find regular joes and janes driving around with briefcases filled with a million dollars in cold hard cash!
Which is why we have mortgages. With the average 30-year mortgage rate hovering at around 3.4%, you’ll have to set aside a portion of your savings in your long-term financial planning to pay for those mortgage rates.
However, in most cases banks offer mortgage rates based on a few important things – your credit score and history, the type of loan you are requesting and finally, the downpayment amount you put down (which is commonly 20% of the property’s value).
There are also adjustable rate mortgages, which offer lower initial rates but go up after a fixed time period – but be warned! The increase in rates may cause a significant impact to your cashflow long term, so weigh your options carefully before opting for this type of loan.
- Closing costs
Closing costs are the related fees that you’ll need to pay to settle the transaction before the contract is signed and you become the rightful owner of your new abode. We can break down closing costs into application fees, credit report, your homeowner’s insurance, title insurance, loan fees, transfer taxes, title search fee, escrow fees and recording fees.
On average, these closing costs totals up to between 2 to 5% of your new home’s value and are due immediately before the sale of the house is closed.
- Moving costs
So you’ve got your new dream home – great! What now? Well, you’re going to need to move your stuff over, of course! Once you’ve completed the sale, you’ll need to set aside some funds to pay a professional moving company to help you move your stuff over. Otherwise, you can round up a couple of able-bodied pals and get your elbows greased and hands dirty – of course, you’re definitely expected to reward their efforts one way or another, either by some pizza and beer or other ways they might appreciate.
Local moving companies on average will set you back about $1000+ (depending on complexity of the job), and anything over a thousand miles will cost you around $4000-$5000 at least.
- House maintenance costs
To truly make your new house a home for you, you’re probably going to need to give it some love. Things like a fresh coat of paint, some new furniture, and a few repairs and upgrades here and there are some of the most common things on the to-do list for new homeowners.
A yearly home maintenance fund is essential in covering these costs, with a suggested amount of $5000 to $10,000 to be set aside for repairs and maintenance of your home, so that you don’t go into any arrears when an emergency fix has to be done. Of course, the amount will vary based on how well you take care of your home.
- Property taxes
When buying a new home, it is worth remembering that your local government will also want a piece of the pie. Property taxes are based on the assessed value of your property and your local town’s tax rate for the period. Once you find your dream home, do your research on the local tax laws and rates for property, and set aside some funds to cover those costs.
The last piece of the puzzle is of course, the downpayment. It is most commonly 20% of the house’s market value, although you can choose to put down more if you wish to do so. Most would-be homeowners (like yourself!) would have already set aside these funds a few years prior to purchasing a new home.
How to afford your new home
With all the costs broken down above, it is now simply up to you to manage your savings, expenditures and financial plans moving forward. Apart from the initial costs, other home maintenance like lawn services, gutter cleaning and HVAC can also cost you more than you expect, especially if you aren’t much of a handyperson to begin with.
Buying a home is a huge investment, and although it may carry some risk – with the right mindset and preparedness beforehand, it can be one of the most rewarding things you’ll do in your lifetime.