Do You Know The Real Costs of Home Ownership?
Unfortunately, the world of mortgages and home ownership can be confusing, overwhelming, and difficult to navigate, especially if you are a first time homebuyer.
While renting is fairly straightforward and is a predictable monthly expense, the costs of home ownership are an entirely different ballgame. There are factors that can affect your financial well-being when buying a home, and if you’re not careful, could end up costing you more money than necessary. Here are 4 important financial factors to consider when embarking on home ownership.
Understand the Real Cost of Your Mortgage
While monthly affordability is important, choosing a mortgage with the lowest monthly payment is not always in your best interest. When shopping for mortgages, you’ll find that longer-term mortgages will almost always have a lower monthly payment than shorter-term mortgages, but you’ll end up paying a lot more in interest over time. Many people want to get the most out of the house as they can, so they’ll opt for a longer-term mortgage with lower monthly payments, but neglect to look at the bigger picture – the total cost of the loan.
Rather than taking out the full amount of financing you are approved for, consider spending a little less and take on a larger monthly payment instead. While it may feel like more money, a greater portion of it will be going towards your principal and you’ll actually spend much less over the life of the mortgage.
Shop Around for Rates
Unsure of whether to opt for a fixed or variable interest rate? This question ultimately comes down to how long you plan to stay in the house. A 30-year fixed rate mortgage will generally have a higher interest rate than a 10-year variable rate mortgage. This is because you are locking in an interest rate for the life of the mortgage in order to protect yourself from the possibility of a significant increase in interest rates down the road. However, if you know you only plan to stay in the house for a few years, you don’t need protection from changes in interest rates 20 or 30 years from now.
By taking a long-term fixed rate mortgage for a house you only plan to stay in for a few years, you’ll end up paying more than you need to. If this is the case for you, consider shopping for the best variable interest rate mortgage instead. Avoid this common pitfall of home ownership by taking the time to do your research and consider different mortgage options and lenders.
Determine if Your Credit Score is Working For You or Against You
The state of your credit score will have an enormous impact on how much mortgage lenders will approve you for and at what interest rate. It will also affect your insurance rates, which is another expense you’ll need to factor into your home ownership budget. It is in your best interest to check up on your credit score before you start house hunting. If your score is low, you won’t get approved for as much as you think you can afford. If you find your score falls below 700, you may want to consider postponing your house hunt while you take steps to improve your score.
Avoid applying for any new credit cards or making other large purchases like financing a car while shopping for a home, as these can all have a (temporary) negative impact on your score. When shopping for a mortgage, your credit history will be under intense scrutiny, so every point counts. While inconvenient, and even though there are ways to buy a home with bad credit, you’ll end up saving yourself a lot of money in interest if you take an extra few months or longer to work on improving your score.
Think Long-Term and Think Resale
When buying a home, you not only need to consider your present needs, but your future needs as well. Ideally, your home will be an investment, and you should treat it as such. Whether you are planning to start a family or heading towards retirement, it is important to consider your future needs and whether this house will fulfill them. Not only do you not want your house to sell for less than you bought it for, but you’ll want to avoid the costs associated with moving every few years – moving costs, land transfer taxes, and closing costs can all put a big dent in your finances.
Don’t Get Surprised by “Hidden” Costs
Many people enter the world of home ownership under the impression that a mortgage essentially just replaces their rent and that there aren’t any other major costs to consider. This is how many people end up in over their heads financially and put themselves at risk of foreclosure. Before buying a house, your budget will need a complete overhaul and will need to include additional costs such as closing costs, ongoing maintenance and repairs, HOA fees, moving costs, property taxes, adjusted utilities expenses, home inspection, and homeowner’s insurance, just to name a few. Be sure to consider all the costs associated with owning a home and factor these into your budget. Having your dream house is no fun if you’re house-poor and living paycheck-to-paycheck. Consider talking with some friends who are already home owners about their experiences and for advice on realistic monthly costs.
A home is one of the biggest commitments you will make in your lifetime and you should make it as stress-free and cost-effective as possible. It is important you do as much research as possible and ask questions to make sure you have a complete picture of the expenses to expect. Still unsure of where to start or already in over your head? Request more information about how our debt relief services can help you.