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Homeownership is one of the most significant milestones in life. However, whether you are still planning to buy a home or have already purchased one, it is essential to consider the financial obligations of owning a house. After all, you would not want to be one of the 90% of homeowners who underestimated the cost of acquiring and possessing real estate.
In this article, we will discuss budgeting for homeownership and offer tried-and-tested strategies to help you manage your finances before and after acquiring the keys to your front door.
Pre-Purchase
Before browsing property listings or attending open houses, you must lay a solid financial foundation for homeownership. Doing so sets you up for a more comfortable and worry-free time owning your prospective property.
Assess your financial situation
Take a comprehensive look at your current financial health. Is your income enough to finance a home? Are you under significant debt, which would otherwise impact your ability to put up a downpayment, pay mortgages, and make other expenses? Understanding where you stand will help determine how much you can spend on a home before, during, and after the initial purchase.
First, calculate your salary, expenses, savings, and debts. Home payments will naturally take up a considerable percentage of your income, but you want leftover cash for necessities, occasional wants, and other financial emergencies. Additionally, consider your income sources, including salaries, financial benefits from employers, and dividends.
Set a realistic budget
A sound budgeting plan is the foundation of responsible financial planning for homeownership. This process is not only about mortgage payments—you must also consider all homeownership costs, such as:
Property taxes
Home insurance
Monthly utilities (power, water, gas, Wi-Fi connectivity)
Upkeep and maintenance
Renovations and redecorations
Ensure your income and budget account for immediate homeownership needs and long-term financial goals. As a rule of thumb, your housing spending should not exceed 30% of your budget, and lower is always better. Likewise, you could save for other hidden costs of buying a house to give your finances flexibility.
Save for a down payment
When you purchase a home, the developer or financing company will generally require a downpayment—an upfront lump sum significantly affecting your payment scheme. It reduces the amount you need to borrow by acting as collateral to receive more favorable mortgage terms, like longer amortizations or lower interest rates.
Aim for at least 20% of the home's purchase price to enjoy lower monthly payments and avoid private mortgage insurance (PMI), which protects the lender if you default. Also, remember that saving for a down payment requires cutting expenses and dedicating a significant portion of your income for this purpose.
Post-Purchase
Congratulations! You are now a certified homeowner. However, the financial responsibility of owning real estate did not end when you closed the deal. Managing your budgets afterward is just as essential to ensure an enjoyable homeownership experience.
Refine your budget
Although you have already set up a budget before buying your new home, it is an essential practice to refine it consistently. You will need to adjust your allocations to accommodate new expenses and avoid dipping into other savings when you need extra cash. So, continuously update your budget to reflect your current financial situation, especially after significant life events like getting a new job.
Also, now is a good time to increase your emergency fund. Add your monthly expenses to this reserve to cushion your finances, including your budget for homeownership costs, from unexpected payments.
Prioritize your mortgage
Monthly mortgages are likely your most significant costs, aside from being the most important. As such, it could be challenging to let go of a large chunk of your cash for this purpose. However, your home is one of your most valuable assets, so focusing on financing it in the long run is more beneficial.
Furthermore, prioritize paying mortgages on time to avoid spending your budgeted money somewhere else and risk defaulting on your obligation. It would not hurt to make extra payments when possible, as doing so reduces the total interest you pay over the loan's lifespan.
Monitor your credit
Your credit score remains crucial even after buying a home. A good score will help you secure better financing for future projects, like home renovations, landscaping, or land expansion. It can also present more agreeable refinancing terms for when you need a new mortgage to support your current one.
Follow your mortgage payment schedule to maintain a good credit score. Likewise, if you have other financial obligations, like credit cards, handle them responsibly and follow the agreed-upon repayment terms. Finally, avoid taking on new debts to keep them from overwhelming your financial plans and causing you to fail to pay mortgages on time.
Prepare Your Budget for Your New Home
Owning a home is a dream for many, but it comes with a sizable price and numerous financial responsibilities. As such, be sure to budget effectively before and after purchasing to have a successful time with your new real estate. Also, remember that it is a long-term investment so stay vigilant and adapt your budget as your circumstances change.
Responsible budgeting and financial management will help you experience the joys of homeownership and ensure your property remains yours for years to come. With the right strategies, this dream can finally be a sustainable and rewarding reality.
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