Setting Aside Money for a New Home? The Unexpected Costs—and Savings—You Should Know
So, you’ve decided to set aside a little money each month towards the purchase of a home. Congratulations! Owning a home can be a huge step forward in your overall financial security: unlike paying rent, which is money you’ll never see again, a monthly mortgage payment is actually a way of making sure you’re putting money into savings as you build equity.
However, it can be all too easy to overextend yourself as you choose a home, apply for a mortgage, and settle into a new routine of home maintenance, utilities, and loan payments. There are several aspects of buying a home that can catch you off guard and even mess with your budget. The good news is, there are some financial perks that can help balance them out, ultimately leaving you ahead of where you started.
Costs of buying a home
In addition to the obvious—the price of the home itself, or at least the percentage that you’re putting in as your down payment—there are several additional costs that you’ll want to account for in your budgeting and savings goals. Consider the following three examples.
- Private Mortgage Insurance (PMI). If your down payment isn’t at least 20% of the purchase price, you can expect to have PMI added to your monthly mortgage bill. On a $200,000 loan, a typical PMI would be approximately $165.
- Closing costs. Unfortunately, the seller does not cover all of the costs at the closing of the sale. As the buyer, you should plan on spending anywhere from 2-5% of your purchase price for an appraisal fee, loan origination, recording fees, and so forth. You will get detailed information, known as a Loan Estimate, from your lender within three days of submitting your application, so the closing costs won’t come as a total shock. (Pro tip: many of these fees are negotiable, so don’t be afraid to ask your lender to lower or even eliminate some of your closing costs!)
- Expenses that you didn’t have as a renter. Look at your budget carefully. What do you currently pay for your utilities? Your landlord may be responsible for many of your utilities, such as water, electric, cable, and trash removal. As a homeowner, you may have new items to add to your budget. Some of these new responsibilities might require you to spend some money at the local hardware store (think garden hoses and a lawnmower), so keep an eye out on the mailer you’re likely to get from the US Postal Service when you change your address—there are usually “welcome home” discount coupons inside.
Savings from buying a home
The good news is, owning your home can also save you money, though sometimes in ways that aren’t as obvious as the expenses:
- You’ll (hopefully) get your security deposit back. Remember that first month in your rental, where you had to come up with the rent AND a security deposit? Assuming you took reasonable care of the property, you should get most, if not all, of your security deposit back (though your lease may stipulate that your landlord can deduct an amount for a carpet cleaning fee or to repair any damage you left behind). That extra money might be enough to buy that lawnmower you need.
- Your first mortgage payment probably will not be due for several weeks—or more. While rent is paid in advance, mortgage payments are made in arrears. So, if your closing happens in May, your first mortgage payment won’t be due until July 1st. Depending on the timing, that could mean that one or two of your former rent payment amounts can be put into savings for that first mortgage payment, used towards some of the expenses described earlier, or used to pay down debt in another area of your budget.
- Property taxes and mortgage interest payments are tax-deductible. Naturally, the amount of the deduction depends on how much you’re paying and your individual circumstances (e.g. tax bracket, dependents, etc.). But, compared with paying rent each month, you’ll save money come tax time because
Buying a home can feel exciting and scary at the same time—committing to a 15- or 30-year mortgage is a significant step, compared with a year-long lease. But, if you look at the costs and savings involved with home ownership, chances are you’ll come out on top. Happy house-hunting!