Financial roadmap for your homebuying journey

Financial roadmap for your homebuying journey
Photo by Taras Zaluzhnyi / Unsplash

Embarking on the homeownership journey requires advance planning to avoid some common pitfalls and minimize overall expense. This checklist will help to ensure you are aware of some of the less obvious costs and preparatory steps you can take as you are saving and planning for your home purchase.

Grasping down payments

The down payment is the initial sum paid to purchase your home and will frequently include many of the ‘closing costs’ associated with the transaction. A higher down payment often leads to more advantageous mortgage terms, such as lower interest rates, avoiding private mortgage insurance (insurance paid by you, the borrower, for the benefit of the lender) and lower monthly payments.

As of year-end 2023, the median down payment was $51,250 (ATTOM) with wide variance from market to market. This dollar figure highlights the importance of saving as early, and as much, as possible. A few tips to help save for your down payment:

  • Set up automatic transfers to a home savings account
  • Investigate any down payment assistance programs
  • Explore down payment co-investment programs like Crib Equity’s
  • Consider CDs and T-bills currently paying above 5% for your down payment funds

For a detailed exploration of current down payment norms, visit Forbes

Planning for closing costs

A surprise to many buyers (especially first-time buyers), closing costs are the fees and expenses paid to finalize a mortgage, transfer title to the property, and pay other service providers. Buyers typically pay between 2-5% of the home's purchase price in closing costs, while sellers might pay between 6-10%.

Financial Analysts at HomeAdvisor note that closing costs can significantly affect a home purchase. To manage closing costs:

  • Compare offers from various lenders
  • Negotiate with the seller to pay some of the closing costs
  • Scrutinize fees for any unnecessary charges

For an extensive review of average closing costs, visit The Ascent by The Motley Fool.

Enhancing your credit score

A higher credit score will enable you to obtain better mortgage rates with the best rates typically requiring a FICO score above 720, or even 740. Lenders view it as a measure of how you have paid bills and managed your finances previously and adjust the interest rate up or down, accordingly. To improve your credit score:

  • Review your credit report for accuracy and dispute any discrepancies
  • Reduce existing debt as much as possible, prioritizing high-interest credit cards
  • Refrain from opening new credit lines or making large purchases before buying a home
  • Pay all of your bills on time, every month

Mortgage experts suggest checking your credit score before house hunting to identify steps you can take to improve. Getting prequalified with a lender is also a good step to set a target budget and understand what your monthly mortgage payments will be. Visit LendingTree for insights on the impact of credit scores on mortgages.

Planning for maintenance costs, improvements, and updates

A home serves as both a living space and an investment that requires regular upkeep. Maintenance, improvements, and upgrades are essential parts of owning a home and, of course, cost time and money. A rule of thumb is to allocate 1-3% of your home's purchase price each year for maintenance. Staying on top of needed maintenance will save money in the long run by avoiding major repair issues while also protecting your investment.

To handle these costs effectively:

  • Obtain a detailed home inspection prior to purchasing to identify aging systems and harder to see issues
  • Focus on upgrades that increase your home's value along with your enjoyment of the home
  • Maintain a reserve fund for unexpected repairs to avoid financial strain

Being proactive with home maintenance is better than being reactive, helping ensure your home stays comfortable and retains its value.

Accounting for taxes and insurance

Property taxes and homeowners' insurance are two costs to be sure to understand as you are shopping for your home. These costs are frequently collected by your mortgage company in an account called an escrow account and then paid by the mortgage company on your behalf from the escrow account. These expenses differ greatly based on location, the value of your property, and other variables like frequency of storms, fires and floods. Typically, you can expect property taxes to be about 1-2% of your home's value annually, and homeowners' insurance can vary from $1,000 to over $3,000 per year.

To prepare for these costs:

  • Investigate tax rates and insurance expenses (compare homeowners insurance pricing from several companies) in the area you are buying in.
  • Include these costs in your monthly budget to prevent surprises
  • Lenders are likely to escrow these payments on your behalf as part of your mortgage payment

Planning for these costs in advance ensures they don't negatively impact your overall budget as a homeowner.

Building a comprehensive homeownership financial plan

With the financial aspects of homeownership discussed, it's time to compile this information into a complete plan. Your financial plan should cover:

  • Your target down payment and how you'll save for it
  • An estimate of closing costs and how to manage them
  • A reasonable monthly mortgage payment that fits with your income
  • A strategy for maintaining and improving credit
  • A budget for ongoing maintenance and future upgrades
  • Plans for property taxes and insurance expenses

The path to homeownership can be personally and financially rewarding though it requires significant financial planning to be set up for success. Begin planning and saving for the down payment as early as possible and research programs and co-investments that are available to help. Anticipate and negotiate closing costs. Calculate monthly mortgage payments to ensure long-term affordability. Review and boost your credit score for the best mortgage terms. Budget for maintenance and future improvements to safeguard your investment. Lastly, integrate property taxes and homeowners' insurance into your financial plans.

We hope you find that using this financial checklist, allows you to be better prepared to handle the responsibilities and enjoy the benefits of owning a home. Remember, a successful home-buying experience comes from thorough planning, diligent saving, and a clear understanding of the financial impacts.