Budgeting Mistakes to Avoid When Buying a House
A home purchase requires careful budgeting before and after closing. But even if you mentally commit to not overspending, the excitement of home ownership could cause you to overlook certain expenses related to the purchase.
Want to keep your finances on track? Here are five budgeting mistakes to avoid on your next home purchase.
1. Forgetting to budget for closing costs
Some homebuyers spend years saving up a down payment. And once they have enough money in their bank account, they apply for a mortgage and start looking for a property. But it’s important to remember that your down payment isn’t the only out-of-pocket expense when purchasing a home.
You’re also responsible for closing costs, which can be an additional 2% to 5% of the sale price. These costs cover a variety of mortgage-related expenses, such as the loan origination fee, the title search fee, appraisal, attorney fees, etc. Even if the home seller agrees to contribute money to your closing costs, you may still have to pay some of these costs out of your own funds.
2. Relying on a mortgage calculator to assess affordability
A mortgage calculator estimates how much house you can afford based on a sale price and an interest rate. However, many online mortgage calculators don’t account for other expenses that make up the actual monthly payment, such as property taxes, homeowner’s insurance, HOA costs and mortgage insurance.
A mortgage calculator might say you can afford to spend a maximum of $300,000, yet the actual amount you can afford might be less once you add in other housing expenses.
3. Underestimating home utility costs
If you’re buying a home that’s considerably bigger than your current home, your utilities will likely increase since there’s more square footage to cool and heat.
There’s no way to know your utility costs with certainty until you move in. Even so, make sure you set aside more than what you’re currently paying to avoid surprises.
4. Not leaving wiggle room in your budget
The mortgage payment is only one expense of home ownership, so don’t forget about the cost of regular maintenance and home repairs.
Some home repairs are costlier than others, such as new windows and a new roof. And depending on the age of the home you’re buying, you may have to spend money on repairs immediately or within a few years of a purchase.
It’s important to spend less on the house than you can afford to allow wiggle room in your budget. This creates disposable income and helps build your savings account for unexpected expenses.
5. Choosing the wrong type of interest rate
You have the option between a fixed-rate and an adjustable-rate mortgage when purchasing a home. The interest rate on an adjustable mortgage is usually lower than a fixed-rate mortgage in the early years, resulting in a lower mortgage payment. Keep in mind that adjustable rates reset after a certain number of years. And when your rate resets, your new mortgage rate and payment might be higher than what you’re currently paying.
An adjustable-rate mortgage certainly makes sense in some situations, such as when you only plan on living in a house for a couple of years and moving before your first rate adjustment.
On the other hand, if you don’t foresee a move in the future, a fixed-rate mortgage is a great option. Your mortgage rate never increases and your home payment remains predictable, making it easier to budget long-term.
You deserve to purchase a home with confidence, and Cherry Creek Mortgage is here to make this happen. Getting a mortgage you can afford is a big confidence booster. Give us a call and let our loan experts answer your questions and guide you through the process.