The latest ING International Survey estimates that around 25 percent of renters believe they will never buy their own homes. As a result, many renters are putting off the dream of homeownership. Besides the ever-rising house prices and increasing barriers, many Americans also underestimate the true cost of homeownership- and all the financial requirements that go with it. Being able to buy your first home calls for much more than being smart enough with your money to save a deposit (although it is the main prerequisite). Before making the leap into being homeowners, there are several financial questions that you need to answer.
How Much Can You Afford For A Mortgage Payment Each Month?
Most financial experts recommend spending no more than 25 percent of your gross income on housing costs. To ensure you get a mortgage you can afford, think of your downpayment first. While you can get a mortgage with as little as 5 percent downpayment, the lower your downpayment the higher the monthly costs of your mortgage. With this in mind, it is always recommended that you aim to save up a 10-20 percent downpayment before making a home purchase. Mortgage repayment calculators can also help you plan your finances ahead of applying for a mortgage. They can give you a glimpse into the estimated APR rates, monthly repayments amounts, and whether you can comfortably fit the cost of your mortgage into your household budget.
What Is Your Credit Score?
Approximately 1 in 8 Americans do not know their credit score, according to an OnePoll study. For those hoping to buy their first home, most of them are also unaware of the role their credit score plays in their homebuying process. Too often, potential homebuyers focus on saving the appropriate deposit and having the required combined income to satisfy the mortgage lenders. However, the lower your credit score is, the higher interest rates you can expect to pay on your mortgage.
Most lenders set the minimum credit score for homebuyers at 620 (except for an FHA loan which requires 500), but while you may be approved for a mortgage, the ensuing interest rate offered by end up stretching your budget if you have a lower credit score. For instance, the average APR rate on a 30-year mortgage is 3.35 percent. Those with a credit score ranging between 620 and 639 can expect a mortgage APR of 4.39 percent. Using the average house price of 320,000 and a 10 percent deposit, this equates to a total housing cost of $517, 354, and total interest payments of $229,354 after 30 years. On the bright side, you can prepare your credit score in the lead up to buying a home by accessing your credit report for free using one of the 3 credit bureaus and using tips like reducing your credit utilization ratio.
Is There Room In Your Budget For Home Maintenance And Upkeep Costs?
The cost of owning a home does not end with the mortgage and closing costs. As a homeowner, you will also incur ongoing expenses to keep your home looking its best and protect the value of your investment. Recent estimates from Clever puts the annual cost of homeownership at $13, 153. With this in mind, you should think about whether your yearly income can cover the costs of maintaining a home including hiring contractors for potential repairs after moving in. A past NerdWallet study found that 12 percent of new homeowners experience a surprise home repair within the first month of moving in.
Then there are the costs of protecting your home. Home insurance costs are calculated based on the value of your home, your location, and the coverage you opt to get. Currently, the average homeowner pays $1,211 for home insurance annually but in some states like Ohio, the cost is marginally lower at $895 per year. Your home insurance premiums can also rise if you live in a high-risk area, opt to secure supplementary flood or fire policies or choose to purchase an insurance policy covering larger home repairs from normal wear and tear. While a cheaper price may seem lucrative, you may find yourself having to pay more for better service, wider coverage for your appliances, and preferred deductibles. Home warranties like these can cost another $350 to $600 per year.
Can You Afford Renovations And Fixer Uppers?
Lastly, have you accounted for any potential renovations or repairs immediately after purchasing your home? According to estimates by HomeAdvisor, Americans spend $9,081 on home improvements and is estimated to grow another 1.5 percent this year. Whether it is replacing old doors or replacing a damaged window, the costs can quickly add up. For instance, HomeAdvisor puts the average cost of replacing a window at $500 per window.
Also, it is worth keeping the costs of renovation in mind when viewing homes and deciding on your home purchase budget. Buying a fixer-upper may come with a lower price but the costs of major renovation projects and uncertainties like construction delays can mean higher costs in some cases. A fixer-upper with major renovation costs can cost you as much as 10 percent of the home’s value to renovate.
Being financially ready to buy a home is about much more than having a downpayment saved up or finding the right mortgage lender. It is important that you take a look at all the financial obligations of owning a home in the short and long term.