Analyzing Your Current Expenses
Most new homeowners find that when they add up their total housing costs in a resale home these costs may be more than rent. But it should be noted that renters moving into a new construction home may very well have cost lower than they previously paid for rent. If you think this might be true for you, can you afford to pay more for housing than you are currently paying? Do you usually have some money left at the end of each pay period? If not, you may need to change some of your spending habits before you can seriously consider buying a house.
If you never planned a budget, you may want to have a clear idea of how you spend your money from week to week or month to month. If this is your situation, you need to look at your spending patterns.
The Cost of Purchasing A Home
Your up front costs will include the down payment, various closing (or settlement) costs, and the cost of moving and settling into your new home.
Down Payment
Virtually all home buyers relay on a loan (or 'mortgage') from a financial institution. And most mortgage products require that you contribute some portion of your own funds (the down payment} as part od the deal. Lenders feel much more secure knowing you have some of your own money invested in the house because you are not likely to walk away from it if your finances takes a turn for the worse.
Traditionally, lenders expected buyers to make a down payment amounting to at lease 20% of the purchase price of the house. This meant that buyers needed a down payment of $12,000 to buy a $60,000 house. Today, buyers can pay as little as 3-5% down provided they purchase private mortgage insurance (or PMI), which helps the lender in case the borrower fails to repay the loan. A 5% down payment on that $60,000 home comes to $3,000. Today the most popular method of down payment are the down payment assistance programs, where the borrower pays nothing at the front end of the loan and the 3% is spread out over the life of the loan.
Closing Costs
Besides the down payment, home buyers must be prepared to pay a number of additional up front costs incurred in buying a home. Collectively called 'closing cost', which in new construction is usually paid by the builder. These expenses generally range in the neighborhood of 3-6% of the amount of the mortgage.
Monthly Mortgage Payment
Since most home buyers are used to paying rent on a monthly basis, they are usually prepared to make monthly mortgage payments. Each mortgage payment includes both the repayment of a portion of the principal (the amount you actually borrow) and the interest (a fee for using the lender's funds). Lenders refer to payments of principal and interest as 'P&I'.
The amount of your monthly payment depends on the amount you borrow, the interest rate, the repayment period (or term), and whether you have a fixed-rate or an adjustable-rate mortgage.
Taxes and Insurance
In many cases, a home buyer's monthly mortgage payments include not only the amount required to repay a portion of the principal and accrued interest (P&I), but also an added amount for property taxes, homeowner's insurance, and private mortgage insurance. The lender holds these additional amounts in a separate 'escrow' account and then pays the tax and insurance bills when they come due. In this way, the lender ensures that these important annual expenses get paid on time. If taxes and insurance must be are not escrowed each month, the homeowner must be prepared to pay these bills when they come due.
Because taxes and insurance are an essential part os a homeowner's housing cost, lenders often refer to the components of a mortgage payments as 'PITI', an abbreviation for principal, interest, taxes, and insurance. Lenders also view condominium and cooperative fees as basic housing costs, though not a component os PITI.
Other Costs of Home Ownership
Other ongoing costs of owning a home include utilities (gas, electricity, and water) and maintenance costs. First-time home buyers are often surprised by how costly basic upkeep is, in term of both time and money. It should be noted that owners of new construction housing will avoid a most of the basic upkeep costs, but are faced with the cost of landscaping. And of course the landscaping cost will be dependent upon the builder and usually the price of the home. With today's oil and natural gas prices being in a state of flux the cost of utilities tend to vary greatly, while repairs often represent an unexpected expense. This makes it imperative that homeowners always have an available cash reserve on hand.
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