Buying a home is expensive, but it’s not just the price of the house itself that you need to plan for. If you’re considering a new home, BetterMoneyHabits.com can help you look beyond the sale price to understand and plan for the extra expenses that come with making this big purchase.
1. Low Credit Score
Your credit score has a big impact on what your mortgage interest rate will be and how much you will need for a down payment. If your score isn’t great, you might not even be approved for a home loan.
You can check your credit report at annualcreditreport.com, or by contacting one of the three credit bureaus: Equifax, Experian, or TransUnion. But if you find you fall into the lower range of credit scores, it is not the end of the world. Check out these BetterMoneyHabits.com videos to get back on track:
2. Down Payment and Private Mortgage Insurance
The more you put down on your new home, the better. Ideally, you will need to put down 20 percent. At that point, you will receive a better interest rate, have lower monthly payments, and you will not have to pay for private mortgage insurance, or PMI.
PMI is a type of insurance that lenders require you to pay if you are unable to make a full 20 percent down payment. This protects them if you default on your loan. And it’s not cheap. PMI can cost up to about 2 percent of the total loan amount. PMI is either required up front, or rolled into your monthly mortgage payment.
With some loans, you won’t have to pay PMI forever, but check with your lender for more details.
If you cannot come up with a 20 percent down payment, there are some alternative options, such as government programs that require just 3.5 percent. For more information, watch Understanding Alternative Mortgage Options.
3. Closing Costs
Closing costs include things like title insurance, appraisals, and attorney fees. Plan on these closings costs being 3 to 7 percent of the total loan amount. And remember, this is on top of the down payment.
4. Unanticipated Expenses
Homeownership may come with some unexpected expenses. These could be increased energy costs, the price of new appliances, homeowner’s association fees, or even just the expense of maintaining a nice yard. So make sure you’ve accounted for all these in your budget. And for good measure, start an emergency fund for those things you cannot prepare for. Learn more by watching Create a Safety Net for Life’s Unexpected Events.
Are you ready for the next step in homeownership? Watch What Makes up a Mortgage Payment to be prepared for the next steps on your home buying journey.
Are you saving for a home? Let America Saves help you reach your goals. It all starts when you make a commitment to yourself to save. Take the first step today and take the America Saves pledge to save money, reduce debt, and build wealth over time. And it doesn’t stop there. America Saves will keep you motivated with information, advice, tips, and reminders about saving for a home to help you reach your savings goal. Think of us as your own personal support system.