As you’re saving for the down payment on your new home, it’s important that you’re taking other steps to be prepared when you’re ready to start your home search. You’ll need to think about other costs as well as your suitability for receiving a loan.
Complete Costs of Owning a Home
When you rent your apartment, you have one payment that covers the total amount of the apartment. With home ownership, you have more than one part of the mortgage amount. There’s the principle amount of the loan, interest on the loan, property taxes and homeowner’s insurance. They’re all vital to the amount you pay each month for your house payment.
The principle is how you lower the amount of your loan each month. The interest is considered the cost of borrowing that money in the first place. Each year, you have to pay a certain percentage of your home’s value depending on what your home’s worth. These property taxes are paid to the city or county. Insurance is a requirement when you have a mortgage. The amount of your homeowner’s insurance will depend on your coverage. Most lenders require that you have enough to cover the cost of rebuilding in case of a disaster. You might want to have more coverage based on the items inside the home.
If you decide to buy a condo, there’s a fifth part of the house payment that you’ll have to make each month. That payment is homeowner’s association dues. When you have a condo, you share space with other people in the building, but someone has to pay for landscaping, maintenance and amenities. Usually, it’s the homeowner’s association who pays for maintenance and repairs on the building and the grounds. The due amount depends on the type of building.
Understand the Tax Benefits
Unlike rental payments, a mortgage interest payment and taxes on the property can be reported when you do your taxes at the end of the year. It can help reduce your taxable income, which can save you money in the long run.
They’ll reduce your monthly costs of home ownership considerably. Instead of paying $1,500 in monthly payments, you should be responsible for approximately $1,200 depending on the original cost of the home as well as how much money is put on the home as a down payment. That should be a factor to consider when figuring out your budget for home ownership.
The Calculations on Whether You Should Rent or Buy
Some people assume that they are calculating the rental amount they pay now versus the mortgage with taxes, principle and insurance costs included when looking at the mortgage amount. In order to make an accurate comparison, you’ll have to look at how much the mortgage would be after tax deductions are figured.
You’ll also have to figure in the huge down payment that you might have to make when buying your first home. While it still might be worth buying a home if it’s in a desirable area, and it has more space than the current apartment where you’re living, it’s important to make sure you’re doing the right comparison.
Budget and Timeline for Buying a Home
Not all homes require a 20 percent down payment. There are some mortgages that only require 3 percent to be put down on the cost of the home. With a lower down payment, you might be required to pay mortgage insurance, which is a certain amount of your loan amount. This amount isn’t deductible on your taxes either.
In some cases, a short-term loan lasting 5 years will lower your rate. After the 5 years, the mortgage payment will be raised after an adjustment. That kind of short-term loan can be suitable if you plan on moving before the 5 year loan gets adjusted.
Consider Your Credit Score
While you’re saving up your down payment, don’t forget to consider your credit score. You’ll get the best rates on mortgages when you have a great credit score. Lenders appreciate people who will back back their accounts on time, and they can see this with a great credit history.
To help establish your credit and raise your score, obtain more credit by opening a credit card or other account and paying on time. Your credit score can drop when you are first applying for a credit card, but once you start making monthly, on-time payments, it’ll go back up to help your score.
It’ll take some time to save up for your down payment, so make sure you’re thinking about your credit score, tax benefits and rental amount versus mortgage payment each month. We can help to make you the right decision.