Buying your first home is exciting, but that excitement can be put on hold when you begin determining your budget and how much of that cash you'll need to stash. But no fear, there is a way. To get you started, see the top five things you'll want to consider when planning your budget for your new home.
1. Down Payment Faux Pas
Through the first-time home buyers program, you can purchase your first digs for 3% down or even less. However, keep in mind that although this route might seem like a better solution now, it can result in costing you some serious dough in the long run ... that is if you are planning to stay in your home for the long run. Since the equity of your new home must meet 20% regardless, you could end up incurring associated fees for private mortgage insurance which typically costs between 0.5% to 1% of the entire loan amount on an annual basis. Also, mortgages that are extended to buyers who make minimum down payments are considered to be higher risk, so it might be worth saving the extra dollars you need upfront in order to avoid this additional expense. This all being said, it is important to make sure you look into all options when it comes to down payments. Variables such as how long you're planning to actually own your home, what your future income holds, will all be factors in determining the best option for you.
2. 30 vs. 15
When determining how to go about deciding on the length of your loan, which will effect your monthly payments, it is wise to consider a 30-year term vs. a 15-year mortgage. Although you may want to pay off your home quicker, you want to ensure you're not stretching yourself too thin financially, especially when there can be unforeseen downturns in the market. Hoping to pay your mortgage off faster than 30-years? Go right ahead and pay more than your monthly, but always know you have the option of a lower payment if you need it.
3. To Afford or Not Afford
Based on your current (not future) income(s) you'll want to understand what type of home you can afford which will allow you to understand not only your down payment that will be required, but closing costs (generally between 2% and 5% of your loan amount) and monthly bills that will come with this price tag. When determining this number, you must realize it is more than just I make $X, so I can afford $X. You need to consider your lifestyle and if you enjoy traveling, entertainment and those off the cuff shopping sprees, then maybe you can cut down on your list of must haves for your home in order to maintain those other areas. For example, don't be like the person on House Hunters who wants a 10 bedroom, brand new build, with a spacious backyard for $1K a month. Be as realistic as possible, and leverage online resources such as nerd wallet to give you an idea of where you stand.
Also, let's not forget that you are no longer renting, so those pipes that burst at 3 am are yours to handle and pay for. Make sure that whatever the price range you're looking in that you are also able to have enough cash to put away monthly towards an emergency fund.
4. So You Have a Type
With so many different options out there for mortgage loans, it is important to review and learn which type works best for you as there are pros and cons associated with each. Loan types can be available to all borrowers, or have specific requirements depending on the size of your loan, your income level, if you're a first time home buyer or not, whether you've served in the military ... the list goes on. For more details on each type and what loan will work best for you, check out this article from the Lenders Network in which they explain all types currently offered in 2018.
5. How To Get There
Especially as us California residents know, it cannot be ignored that home prices are skyrocketing and it is more challenging then ever to be a home owner. As of December 2017 according to the California Association of Realtors, the median home price in San Diego is $605K which is $265 per square foot. Not only that, but the inventory available for those who can afford these prices has been consistently declining for the past 13 months.
Now, no more statistics, but do know that you should anticipate that the buying process will not necessarily be a quick one. Make sure you are pre-approved and ready to make an offer if one comes your way. A step in the right direction to increase your odds for pre-approval is to make sure you've saved enough in the bank for your purchase. Beyond just cutting costs here and there, look into new innovative ways that can help you get to where you want to be financially. One option I've found helpful is digit. This application calculates an amount of money to set aside every day that is based on your income and spending and automatically saves it for you. Within no time, you'll feel as though your future savings goals are in reach without you even noticing.