Making the dream of homeownership a reality
For many people, owning a home is an important personal and financial goal. Homeownership is a way to invest in your family’s future and can play a significant role in establishing financial security.
However, buying a home for the first time can be a complicated undertaking. If you’re considering taking this step, it’s important to learn about the costs involved and understand all of your options.
Consider your priorities
Homeownership isn’t for everyone, particularly for those thinking of moving in less than five years. The expenses associated with buying a home — such as realtor fees, closing costs, and moving expenses — can eat into your home appreciation during such a short period.
If you’re not ready to make a long-term investment in a home, consider other ways to help establish financial security for the future. Saving for retirement, building up emergency savings, and establishing a child’s college fund are also important financial goals.
Set a budget
Before you commit to buying a home, it’s important to decide how much you’re willing to spend on mortgage payments. Most financial professionals recommend spending a maximum of 36% of your income on debt, which includes your mortgage.1 Consider your family’s total annual income and your other sources of debt — including credit card balances, student loans, and car payments — to figure out what the amount and type of mortgage you may be able to afford.
Get a handle on hidden costs
First time buyers may not be aware of the many costs involved in buying a home. The term “closing costs” refers to the fees and expenses that are typically required in the home buying process, including those for mortgage insurance, title search, property taxes, and more.
Closing costs for the buyer are typically between 2% and 5% of the loan amount.2 New homeowners also should plan for moving costs, realtor fees, and miscellaneous expenses. Preparing for these costs can help you set a realistic budget.
Check your credit score
Your credit score may be a critical factor in the home buying process. Borrowers with high credit scores are more likely to receive low interest rates on their mortgages. For example, someone with an excellent credit score of 760 or above may pay $854 a month for a $200,000, 30-year fixed mortgage, while a borrower who falls in the 660 – 679 range may be required to pay $922 a month. Over the course of 30 years, that’s a difference of more than $24,000 in interest payments alone.3
If you’re in the market for a home, it’s important to know where your credit score falls. Lowering debt and making timely payments may improve your score within just a few months.
Plan for home expenses
Once you officially own a home, you may need to follow a budget for home-related expenses. Homeowners must pay principal, interest, taxes, and insurance (often referred to as PITI) on a monthly basis. On top of that, you may be responsible for homeowners’ association fees.
Financial experts recommend setting aside 1% to 4% of the home’s purchase price each year for maintenance and upkeep.4 Budgeting in advance for routine repairs and renovations may help your family remain financially secure when faced with unexpected expenses.
If you’re ready to make the dream of homeownership a reality, talk to a financial professional to discuss your options and develop a plan for your family’s financial future.