Excitement of Buying A New Home
There’s not much more that can stir up excitement and anxiety at the same time like buying a home. The thrill of moving into a new neighborhood, making the house your own and building memories can be quickly overshadowed by loan complications, closing costs, home repairs to pass inspection, and other unexpected expenses. So if buying a new home is in your future, there are a few things to keep in mind to steward your finances through this new transition.
Evaluate Your Budget
It’s hard to be honest with ourselves and our situation sometimes, especially with an opportunity like a new home sitting on the table. However, make every effort to honestly evaluate if this investment is wise for you and your family right now. In a housing article for LearnVest, Alden Wicker shares some words of wisdom from financial planner Tom Gilmour.
“As a general rule of thumb, you should be looking at home prices that are two to three times your annual income,” says Tom Gilmour, a CFP® at LearnVest Planning Services. “This helps ensure that you’re not taking on a larger mortgage commitment than you can afford. Speaking of mortgages, Gilmour recommends that payments generally not exceed 28% of your monthly gross income—but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more.”
Another rule of thumb to determine if a house is affordable is can you afford to immediately put down 20 percent? If you can’t, it may be time to buckle down on a savings plan to help you put toward a down payment, or look for a home in a different situation.
Evaluate Your Risk of PMI
One of the reasons it’s important to save enough for a down payment is the added costs of PMI. Private mortgage insurance or PMI is an extra insurance charge that banks may tack onto your loan if you can’t put down a full 20 percent.
Glenn Curtis for Investopedia warns of these PMI pitfalls.
“Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month – assuming a 1% PMI fee. (Calculated as: $100,000 x 1% = $1,000 / 12 = $83.33) By itself that’s a pretty hefty sum.”
He continues that once the equity of the home reaches 20 percent, the PMI can be canceled. But it’s often not that simple
“Eliminating the monthly burden isn’t as easy as just not sending in the payment. Many lenders require the homeowner to draft a letter requesting that the PMI be canceled, as well as receive a formal appraisal of the home prior to its cancelation. All in all, this could take several months depending upon the lender.”
It can be tempting to make a status statement with your current home, but homes can’t talk. Your character does. Your relationships do. Make every effort to be realistic about your current budget and situation, and make wise choices based on your current situation, not on what it could be. A bigger home may seem appealing at the outset, but if this beautiful new home is aimed to fill your friends with envy, what good is it if it may also be draining your wallet? If it’s twice the size of your current home, what impact will it have on your utilities? Is there insulation in the attic? All are questions you need to consider before signing you name next to an offer.
A bigger home will for sure affect utilities each month, so carefully assess your budget to see if and how you can afford the additional square footage. Evaluate the insulation in attic, as well as doors and windows to determine if they are already energy efficient, or if they need shoring up. Every dollar counts.
Buying a home is an exciting milestone in anyone’s life. But it shouldn’t be taken on without the proper research and evaluation. Our lives are so much bigger than our homes. You want your home to support and shelter you as you and your families learn and grow. You don’t want to be supporting your house. Choose carefully when buying your home sweet home.