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 of 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 more 1,000 homeowners about the most expensive home buying mistakes they made. 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
More than 68 percent of homeowners surveyed said they didn’t save enough for a down payment before purchasing their home. A down payment is the amount of cash you put toward your new home before taking out a loan. Generally, the more you put down, the better off you’ll be in terms of your mortgage costs.
Traditionally, financial advisors have suggested that you should make a down payment of 20 percent 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 percent down. Putting such a low amount of funds toward your down payment is one of the biggest home buying mistakes you can make, since it affects so many other factors related to your mortgage.
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
According to the survey, 59 percent of American homeowners said that they didn’t have enough saved after closing. This means they may have put the right amount of cash toward their down payment, but failed to take closing costs and other fees involved in buying a home into account.
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 between 2 and 5 percent 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
Fifty-seven percent of Americans surveyed wish they would have shopped around more for a mortgage. In addition, 42 percent of those surveyed believe that their interest rate is too high. Of all of the purchases you will make in your lifetime, this is the one that demands the most thorough upfront research, since it will probably be your largest purchase and you will spend nearly half of your life paying it down.
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. It can also be a painful process, but failing to do your homework is one of the biggest home mistakes you can make.
4. Monthly mortgage payments are too high
Among the homeowners surveyed, 52 percent 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 (the first home buying mistake discussed here) 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 percent of Americans can’t handle an unexpected $500 expense (based on another survey by Freedom Debt Relief), 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. Not understanding the costs of home ownership is one of those home buying mistakes that sneaks up on you after the fact. Nearly 59 percent of homeowners surveyed stated that maintenance and repairs were more expensive than they had expected.
Paula Pant, of The Balance, suggests using the Square Foot Rule when setting aside cash for home repairs and maintenance: “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 homeownership, the bottom line is: the more you save in advance, the better off you’ll be. The home buying mistakes that a majority of homeowners face come down to not having saved enough. You never know for sure just how much you need to save for a home, but 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?
Understanding the upper limit for how much you can put down on a mortgage will have a direct effect on your interest rate, PMI, and monthly mortgage payments. While you may not need to pay the full 20 percent, 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 your mortgage. Getting five quotes could save you up to $3,000, 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 percent 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—and your monthly budget as a whole—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. 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. Racking up credit card debt is among the biggest home buying mistakes, especially if it becomes difficult to make your mortgage payments.
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.
Avoid home buying mistakes and plan for financial freedom
Learning how to manage money, make wise purchasing decisions, reduce debt, and plan for your future doesn’t need to be too difficult. Find the tools you need to move to a better financial future with our simple-to-follow financial guide. Get started by downloading our free guide today.
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