Buying a home is a major life decision, and often a hard-fought financial milestone. You’re signed up for 30 to 50 years of housing payments — but you would have been doing that as a renter anyway, right? With each payment on your home loan, however, you’re gaining equity, so all it not lost. That said, the only difference about renting and owning isn’t the destination of your monthly check. There are a few other financial changes to take into account before make the transition.
Instead of a relatively small security deposit — usually equal to a month’s rent — you’ll need to save up potentially tens of thousands of dollars for a down payment. Depending on the terms of your loan, you’ll need to pay between 10% and 20% of the home’s value, which adds up quickly and remains one of biggest obstacles for hopeful home buyers. If you just don’t have the cash, there are options to pay much less upfront — sometimes as little as 3.5% if you take out a Federal Housing Administration loan. These lower down payments, however, make for higher monthly payments both in principal and in likely required private mortgage insurance, leading to a higher home price overall.
On top of the down payment, there are the closing costs, which average about $2,100 on a $200,000 home. Although that sounds like quite a lot, it can cover home loan origination, title insurance, land survey, home inspection (a valuable investment), insurance escrow, appraisal, and more.
It’s not only your mortgage that you have to pay on a monthly basis. Considering the size of financial investment you’re making, you’ll want to protect it with insurance. Homeowners insurance is necessary to protect your house, your belongings, and your mortgage, so much so that many lenders require it.
Before annual or semi-annually billed property taxes come due and you need to dip into your emergency funds to pay, set a little money aside for it each month. Your tax rate, usually a percentage of the assessed value of the land and the structures on it, is highly localized, but the average U.S. household pays just over $2,000. Many mortgage lenders require that money is put in escrow monthly for the tax, but even if it isn’t required, it’s just good practice.
Even if you’re buying a brand-new house that should be impervious to breakdowns or malfunctions, you’ll want to plan on spending at least 1% of the home’s value on maintenance projects each year. Create a monthly checklist of tasks so you can chip away at maintenance over time without anything crucial getting overlooked: HVAC inspections, roof surveys, fireplace cleaning, appliance checks, etc. If unused, this maintenance cash will come in handy for larger projects, such as a roof replacement.
Depending on your new home (and your old one), you might also need to allocate some cash to pick up a lawn mower, weedwacker, snowblower, shovel, rake, or other tools to keep your property polished, safe, and meeting municipal requirements.
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