Buying a home is an exciting process. What will your new house be like, and what sort of wonderful memories will you make there?
Before you can begin settling into the new chapter of your life, you need to figure out how much you can afford to pay for your new house. And there may be a lot of hidden fees during this process that you weren’t banking on.
From closing costs and interest rates to escrow and maintenance costs, your home budget may be different than what you originally expected. Read on to discover what goes into the cost of a new home, and how you can budget well for it.
What’s Your Monthly Budget?
When you’re figuring out how much to spend on your new house, the first thing you need to determine is your overall monthly budget. This will be the biggest factor in determining your overall mortgage budget.
Remember: It’s always better to shoot slightly under what you think the maximum you can afford is.
In general, it’s a good idea to aim to pay about a third of your monthly income in mortgage each month. Of course, your mortgage will include interest and escrow, as we’ll discuss later. But shoot for a monthly budget that’s between 30 and 33 percent of your total take-home pay.
What’s Your Down Payment?
The other thing you need to consider when figuring out your housing budget is how much you have saved up for a down payment. For one thing, your down payment won’t be included as part of your loan, so you can count that out of the price of the house you can afford.
The larger your down payment, the more house you’ll be able to buy.
Your down payment will also determine if you have to pay mortgage insurance each month. Mortgage insurance protects lenders in the case of small down payments. If you default on your loan, the bank isn't left holding the bag. In general, you want to aim to put down 20 percent of your total home cost.
Estimate Your Interest Rate
Aside from the actual principal on the loan, the biggest thing that will impact your monthly costs is your interest rate. Your interest rate will be based on a few factors, including your income, your credit history, and your debt-to-income ratio. An interest rate that’s lower by even a few fractions of a percentage point could save you thousands over the life of your loan.
Right now is one of the best times in modern history to buy a new house. Interest rates are at an all-time low, and if you get a fixed-rate mortgage, you can lock those rates in for the entire life of your loan. You can use online estimator tools to figure out how much your mortgage will cost each month with different interest rates.
Factor in Escrow
The other expense you need to plan for in your mortgage payments is your escrow account. Your escrow savings go toward paying your home insurance and property taxes each year.
Instead of you having to pay those huge lump sums every year, your escrow account will handle those automatically, dividing the annual costs out by month and adding that charge to your basic mortgage payment.
Your escrow payment amount will depend on a couple of factors. If you’re buying a new house, you should have a relatively low insurance cost, since there won’t be as many internal concerns to worry about. But your location will also determine how much you’ll pay in property tax and disaster insurance.
Consider Closing Costs
You might be surprised to learn that your closing costs can also go into the overall price of your loan. Closing costs are the fees associated with the actual transaction of buying your home. They can include attorneys’ fees, real estate agent fees, inspection fees, title search fees, and more.
You may have the option of rolling your closing costs into your loan. If you have a down payment that’s more than 20 percent of your overall loan, you might want to consider paying these upfront to avoid the extra principal and subsequent interest. But if you’re working with a tighter upfront budget, you can finance these costs as a part of your mortgage.
Don’t Forget Maintenance Costs
Aside from your routine mortgage costs, you also need to consider maintenance costs when you’re budgeting for your new home. Yes, you might be able to buy a home that will only cost you 25% of your monthly budget. But if you have to spend another 15% on landscape maintenance, you’ll find yourself in over your head.
Newer homes are often great options for homeowners looking to keep maintenance costs down. Because everything is new, you won’t have to worry about major expenses — like replacing appliances or buying a new roof — anytime soon. Your maintenance costs should be limited to landscaping and utility bills, which leaves you a larger budget to dedicate to your home.
Pay the Right Price for Your New Home
Trying to decide how much you should pay for a home can be a complex process. In addition to the basic price of the home, you need to account for interest, escrow, and closing costs. You also need to make sure you’re saving money for home maintenance costs so you don’t wind up over your budget and in over your head.
If you’d like to find the best new home for you, check out the rest of our site. We believe your journey begins at home, and we’re here to help you step out on the right foot. Fill out the form below and find the perfect place for your family to begin the next chapter of your lives.