No matter where you settle down, buying a home is a huge accomplishment. But the home purchasing process can be one of the most expensive and stressful times in your life.
If you’re not ready for all of the costs of buying and owning a home, you could spend the first few years in your new home trying to keep your head above water.
To help you prepare for these costs, Freedom Debt Relief polled over 1,000 homeowners about the most expensive mistakes they made when buying their home. Knowing about these common pitfalls could save you money and set you up for success as a homeowner.
1. Not Saving Enough for a Down Payment
Over 68% of homeowners surveyed said they didn’t save enough for a down payment before purchasing their home.
As you may know, your down payment is the amount of cash you put toward your new home before taking out a loan. Traditionally, financial advisors have suggested that you should make a down payment of 20% of your home’s value. This allows you to avoid Private Mortgage Insurance (PMI), lower the cost of your monthly mortgage payments, and potentially lower your interest rate.
But the reality is, most homeowners put much less than 20% down.
While making a down payment of 20% may be out of reach, it’s important to have as much cash as possible socked away. That way, when it comes time to buy your new home you won’t be stuck with high PMI payments on top of an unaffordable mortgage.
2. Not Saving Enough After Closing
59% of American homeowners said that didn’t have enough saved after closing.
Closing costs can come as a surprise if you don’t do your research before taking out your mortgage. These costs may include state taxes and fees, lender fees, points, and origination. All told, they can add up to 2%-5% of the purchase price of your home.
Since you may have to pay these fees when you take out your mortgage, make sure to prepare yourself for this additional expense by saving a little extra before searching for your new home.
3. Not Shopping Around for a Mortgage
57% of Americans wish they would have shopped around more for a mortgage. In addition, 42% of Americans believe that their interest rate is too high.
According to Freddie Mac, less than half of prospective homeowners shop around for a mortgage. This results in leaving money on the table—sometimes to the tune of thousands of dollars. Shopping around for a mortgage rate could help you secure a lower interest rate and better terms. That said, it can also be a painful process.
No one enjoys the toils of taking out a mortgage, much less applying for many different offers—but the money you save on your mortgage may be worth the effort in the long run.
4. Monthly Mortgage Payments Is Too High
Among the homeowners surveyed, 52% stated that their mortgage payments are too high. High mortgage payments may tie back to the fact that many Americans don’t make enough of a down payment and are left with a high mortgage.
But there are other reasons that Americans might be feeling the squeeze, too. Considering the fact that 54% of Americans can’t handle a $500 expense, it’s no wonder why homeowners are stressed about making their monthly mortgage payments.
If you’re thinking about buying a home it’s crucial that you understand how much you’ll be paying each month on your mortgage, and make sure that you can afford it. To help you free up some extra room in your budget and make sure you’ll be able to pay, start by tackling your credit card debt.
5. Not Preparing for the Costs of Home Ownership
It’s easy to forget that home ownership means more than paying your mortgage, electricity, water, and other monthly recurring bills. You also have to be prepared to pay for random repairs and maintenance—not to mention property taxes.
In the recent Freedom Debt Relief survey, nearly 59% of homeowners stated that maintenance and repairs were more expensive than they had expected.
According to Paula Pant on The Balance, one guideline when setting aside cash for home repairs and maintenance is the Square Foot Rule:
“A general rule is that you should budget $1 per square foot per year for maintenance and repair costs. If you own a 2,000-square-foot home, for example, budget $2,000 a year for maintenance and repairs.”
While she goes on to explain that this budget should be fine-tuned to accommodate your specific situation, it’s a good place to start when purchasing a new home.
Set Yourself Up for Success
When preparing for home ownership, the bottom line is: the more you save in advance, the better off you’ll be. The issues that a majority of homeowners face come down to not having saved enough.
While you can never be sure just how much you need to save before you put an offer in on a home, it’s a good idea to ask yourself the following questions before taking out a mortgage:
How much of a down payment can you make?
This number will have a direct effect on your interest rate, PMI, and monthly mortgage payments. While you don’t need to pay the full 20%, the more you can pay the better.
How many mortgage quotes have you looked at?
Getting one extra quote could save you $1,500 over the life of you mortgage. Getting five quotes could save you up to $3000, according to Freddie Mac. Looking for mortgages is a painful process, but it’ll be worthwhile if you’re able to save money. So don’t be afraid to compare rates and find the best offer for you.
What is your monthly mortgage budget?
Generally, mortgage lenders will only let you get a mortgage with monthly payments equal to 28% of your household’s gross income. But if you’re dealing with student loans, car payments, or credit card debt, you may want to consider how those costs impact your ability to pay.
Can you pay closing costs and still have enough to cover an emergency repair?
If paying for closing costs is going to deplete your savings, you may want to consider holding off on taking out a mortgage. While you may be tempted to put all of your life savings into your down payment, the reality is that emergency repairs happen. If you don’t have an emergency fund that can cover those repairs, you may end up having to rely on credit cards to fix your home. And racking up credit card debt is the last thing you want to do when you’ve just purchased a home.
By asking yourself these questions, making sure you have enough saved to cover a down payment, closing costs, and emergency repairs, you’ll be on the road to success as a new homeowner!