Now that you have a better understanding of what a mortgage and proof of income are, we’ll dive into how to create a budget that will make purchasing a home a reality. Saving for a house can be intimidating, but creating a good budget ensures that you will have enough financial freedom to buy a home that you love.
So far in our home buying series, we’ve covered a lot of the basics that first time home buyers need to know, like the differences between renting and owning a home and the credit score that’s needed to buy a home. But before you can actually start with your home buying process, you need to learn how to budget.
Buying a home will probably be the biggest purchase you ever make in life, so it’s crucial to have enough money saved up so that you don’t end up house poor, which means that you spend most of your income on homeownership. You can have the most amazing home in a perfect location, but if you can barely make those monthly mortgage payments, the only thing you’re going to experience during that time is stress.
In this chapter, we’ll be discussing how to budget for a home, what a budget for house buying should include, why budgeting for a home is important, and more. Consider making the time and effort to create a budget now so that you can live comfortably in your dream home later.
What Should a Home Buying Budget Include
Everyone’s home buying buying budget will look different, but for the most part, your housing budget should include the following:
- Mortgage payments: The biggest portion of your home buying budget will be your monthly mortgage payments. How much your mortgage payments are will differ for every person depending on the cost of the house and the mortgage term they choose. For example, a 30-year mortgage will have much smaller monthly payments than a 15-year mortgage. However, you’ll have to pay more interest with a 30-year mortgage, so you need to weigh the pros and cons before deciding on which mortgage term is right for you.
- Mortgage insurance: Not everyone’s budget will include mortgage insurance. If you’re able to make a 20% down payment on a home, you might not need private mortgage insurance. But in order to make that down payment, you’ll probably need a lot of money saved up.
- HOA fees: Depending on where you live, you may have to pay HOA fees. HOA fees are home ownership association fees that homeowners typically pay monthly. These costs go towards creating a safe and clean neighborhood. How much you pay in HOA fees will vary depending on where you live.
- Homeowners insurance: Homeowners insurance provides coverage for private residences and is very important to have when you buy a home. Homeowners insurance offers protection from damage or loss that’s caused by events like storms, fires, and theft.
- Repairs and maintenance: When you rent a place, it’s your landlord’s responsibility to pay for repairs and maintenance. But when you buy a place, those responsibilities land on your shoulders. Repairs and maintenance can add up quickly, so make sure you account for that in your home buying budget.
- Utilities: As a homeowner, you’re also responsible for paying for all the utilities. There’s no added perk of having your landlord pay for water and trash. Paying for the utilities—which can include electricity, gas, water, and internet—is all on you.
- Property taxes: Property taxes will differ for everyone depending on where they live, but every homeowner has to pay them. Property taxes are based on your home’s value and the property tax rates in the city that you live in.
Buying a house isn’t as simple as just making a down payment, getting the keys, and then never having to think about money again. There are a lot of first time home buyer expenses, and these expenses don’t just go away when you move in. This is why budgeting for a home is so important. You need to have ample money saved up just so you can cover these costs—not to mention the costs of moving in and your regular living expenses, like your grocery budget and transportation.
One of the most common budgeting mistakes is overlooking certain expenses. Just living in itself is expensive, and adding in all these homeownership costs can be scary. This is why it’s so important to know how to budget for a house so that you can feel prepared for all the costs that come with it.
Why Is Budgeting for a Home an Important Step?
It’s crucial to have a budget for buying a house for many reasons, such as:
- Helps you control your spending: If you’re planning on buying a home soon, that probably means you need to cut back on some of your spending—at least for the time being. So you might not be able to get that morning iced coffee or monthly back massage, but at least you’ll have money saved up to buy your dream home. Consider putting aside some of your savings from each paycheck towards buying a home.
- Gives you insight into your financial health: If you just buy a house without budgeting or looking at your finances, your spending can easily get out of hand and you can land yourself in a sticky situation. But budgeting gives you insight into your financial health and helps you manage your monthly inflows and outflows, so you can keep track of your spending.
- Can help you make better financial decisions: A very common home buying mistake that many first time home buyers make is buying more than they can afford. As much as it might hurt, if your dream home is out of your budget, it may be a good idea to pass on it. Spending more on a house that you can afford will just cause more stress and anxiety down the line.
- Helps you save money: The most important part of budgeting is that it helps you save money. Without a budget, there’s no way to tell how much money you’re spending compared to how much money you’re bringing in. But having a budget makes you more aware of your spending habits so you can figure out where you need to cut back on costs and how you can save more money.
The Costs Involved in Homeownership
The costs involved in homeownership go above and beyond just the price tag of the home. There are a lot of other expenses you need to account for, which is why it’s imperative to know how to budget for a home.
Look Beyond the Mortgage
Your monthly mortgage payments are one cost, but the costs don’t end just there. You need to look beyond the mortgage and think about all the other expenses that come with homeownership, such as closing costs, utilities, and maintenance.
Planning for the Unexpected
In addition to all the expenses that you know come with homeownership, you also need to plan for the unexpected. Maybe there was a big storm and your power is down and you need to get a generator. Or, maybe there was a robbery in your neighborhood and now you want to buy a security system for your home. Things happen and you need to be able to afford these unexpected expenses.
As for a general rule of thumb when it comes to home maintenance, take note of the one percent rule. The one percent rule says that you should consider setting aside 1% of your home’s value each year for maintenance. For example, if your home is valued at $500,000, the rule dictates that you should set aside $5,000 each year to go towards unexpected maintenance costs.
Factor in Property Taxes
Property taxes will differ for each city, but they can easily add up. Certain places have much higher property taxes than others, so it’s definitely something you want to factor into your budget when you’re thinking about where you want to settle down and buy a house.
Bottom Line: Calculate Properly and Budget Accordingly
Buying a home is something you work towards for years, but budgeting for that home can be intimidating. If you need help with creating a budget to buy a home, you can use Mint’s financial calculators, which can help with everything from creating a budget to figuring out how much home you can afford.
It’s important to have a good basic understanding of the role that budgeting plays in your home buying journey so that you can feel prepared for all the costs associated with homeownership. Buying a home is not something you want to go into blindly. The more prepared you are for these costs, the smoother your home buying experience will go.
If you want to learn more about homeownership, be sure to continue reading the next chapter in the series, where we’ll cover the dos and don’ts of home buying.