How to Budget for Your First Home | United Financial Freedom

How to Budget for your First Home Look out for these fees before you buy!

When it comes to buying a home, there’s a lot you have to plan for—monthly mortgage payments, home insurance, and all the extra fees that pop up when you sign the paperwork on your new home.

Not to mention, you’ll have to plan for the costs of homeownership along with the costs of daily life.

It’s not unusual to feel overwhelmed, especially for first-time homebuyers.

You’ll probably be working overtime as your own financial planner (unless you can afford to hire one).

Fortunately, some careful planning before you buy your dream home can help make financial planning a much easier task.

Whether you’re already feeling the burden of budgeting for your expenses, or you’re just beginning your home-buying journey, keep reading!

We’ll explain the extra costs of homeownership you might not know about, and how you can plan for them.

Your Mortgage

When budgeting for your new home, the first thing that’ll come up is your mortgage.

Think of it as the foundation of all the expenses that come with buying a home.

Consider your loan term first. The two most common terms are 15 years and 30 years—a 30-year term is far more common.

So, let’s say you take out a 30-year, $400,00 fixed-rate mortgage with a 3% interest rate. That interest rate is pretty low, and at $1,686 per month, it might seem like a good fit for your budget.

Well, we can’t forget about interest.

You’ll pay an extra $207,110 towards interest on top of your $400,000 loan principal.

That’s profit for the bank.

With a 15-year loan term, you’ll avoid paying as much interest, but in that same scenario, your monthly payment would be a whopping $2,762.

You’ll need to decide between a fixed or variable interest rate too. Variable interest could save you a lot of money, but it comes with some serious risks.

Overall, you’ll need to be prepared to pay the bank a whole lot of interest over time if a shorter loan term doesn’t work for your budget.

Other Fees

With your mortgage costs out of the way, let’s dive into the other fees that will likely come up during the home-buying process. Some of these fees are tacked onto your closing costs, while others may be ongoing.

Title Fees

When you buy a home, the title will need to be transferred from the seller’s name to your name.

Think of title fees as the stake to your claim on a property.

Typically, you’ll need to pay for a title search to make sure no one else has a claim to your new home.

After that, you’ll pay for the title itself, and your lender may ask you to pay title insurance to ensure their loan is protected and legal.

When it’s all said and done, you can expect to pay $100 - $200 for a title search, and 0.5 - 1.5% of your purchase price for title insurance (as a one-time fee).

Origination & Document Preparation Fees

Your lender has to make money for their services.

As a result, origination, underwriting, and document preparation fees will usually be added to your closing costs. Your origination fees will typically cost 0.5% - 1.0% of your loan amount, so you may be able to pay these fees outright. If underwriting fees aren’t included in your origination fee, they’ll typically cost another $300 - $1000.

Beware of junk fees! In some cases, your lender might add extra fees to put more money in their pocket.

Beware of unusually high prices for underwriting, loan processing, and broker rebates.

Appraisal & Inspection Fees

Before your lender approves your loan amount, they’ll send an appraiser to judge your loan-to-value ratio.

Essentially, the lender wants to see if the value of the home is worth the loan they’re offering.

The lower your ratio is, the better off you’ll be.

A higher ratio makes you a greater risk for the lender, and they might force you to pay a higher interest rate and/or private mortgage insurance.

An appraisal will typically cost you $300 - $1,200.

Next, your lender will probably require an inspection to ensure your home doesn’t have any major structural damage. This works in your favor, because the inspector may notice an issue that you didn’t

Still, you’ll end up paying—generally $200 - $500 depending on your location.

Homeowner’s & Private Mortgage Insurance

Homeowner’s insurance is another hefty expense, but you’ll probably want it. It’ll protect your home and possessions in case of a fire, natural disaster, or theft.

The national average (as of 2021) for homeowner’s insurance is $1,015 per year. But this number will vary by location, your home’s value, and the coverage option you choose.

Like we mentioned earlier, private mortgage insurance (PMI) is another fee that your lender might require you to pay if they decide your loan is a risk.

PMI can be a result of a high loan-to-value ratio, but it’s typically due to a down payment of less than 20% of your loan amount.

Remember our loan scenario? Take the same 30-year, $400,000 loan with a 3% interest rate. If you can only afford a 10% down payment, you’ll pay $296 per month on top of your monthly mortgage payment!

Usually, you’ll continue paying PMI until your mortgage balance reaches 78% of what you originally paid for the home.

For reference, PMI costs anywhere from 0.5% - 1.9% of your loan amount each year.

Taxes, Escrow, & HOA Fees

Both your property taxes and HOA fees will depend specifically on the location of your new home. So, you’ll need to do some research on your home, but you should expect to pay the first couple of months of property taxes at closing. HOA fees will depend on your neighborhood and the extras it provides. Your neighborhood might not even ask that you pay HOA fees, but if they do, you’ll probably pay $200 - $800 per month. Finally, escrow fees will be included in your closing costs. Funds will be held in an escrow account and distributed for:

• Local taxes
• Homeowner’s insurance
• Real-estate attorney fees
• Origination fees

Typically, escrow fees will cost 1 - 2% of the price you paid for your home.

Your Total

We get it—it’s not fun to think about all the extra costs when you’re looking forward to the home you’ve always wanted.

So, if you’re looking for the short answer to how much you’ll pay, here it is:

2 - 5% of your original loan amount.

To put that number in actual terms, the national average for closing costs in 2020 was $6,087 with taxes included.

The truth is, there’s no way around most of those fees. Plus, you’ll need to have some extra cash saved for moving expenses, furnishing your home, and making renovations.

So, making a big investment is never cheap. But closing costs aren’t what's putting the greatest burden on your bank account.

Your Wallet’s Enemy…

If you’re feeling dizzy after looking at all those extra fees, we don’t blame you.

But think back to our section on mortgage interest for a moment—that cost is awfully steep.

Sure, 2 - 5% of your loan amount going to closing costs isn’t any small sum, but it’s a necessary evil to secure your dream home.

Interest payments, on the other hand, aren’t really necessary.

Like we said—interest is profit for the bank. And the longer you spend paying off your loan, the more money they’ll make.

That doesn’t mean you should try to pay off a 15-year loan if it’s not in your budget. A shorter term isn’t affordable for most homeowners.

So, how about 7-10 years instead?

Debt-Free Made Simple

No, you’re not dreaming. This isn’t a joke.

The solution is called the Money Max Account, and it really can help you pay off your mortgage and other debts in as little as 7-10 years.

Have you ever heard of a 7-year loan term?

We didn’t think so. That’s because your lender wants you to stay in debt longer and spend more.

Like we said—buying a home is never going to be cheap. It’s an investment, your investment.

So, it should be filling your pockets and not the bank’s.

With this idea in mind, we created the Money Max Account to work for your financial needs. It’s an all-in-one account that tracks your expenses, debts, and payments.

That means you don’t have to spend hours trying to be your own financial planner. Money Max does it for you!

The Money Max Account uses advanced banking software to calculate the fastest path out of debt. In no time, you’re left with a monthly payment plan that suits your financial needs.

And because Money Max is designed to work for you, you’ll always decide where your money goes.

If you need a little extra cash to take the family on a vacation, it’s all yours, anytime.

Before you know it, you’ll be out of debt and in control of your financial future—as it should be.

To learn more about the Money Max Account and its features, visit our website or call now. Our representatives are standing by to help kickstart your future of financial freedom.

So, be transparent with your lender. If you do it right the first time, you’ll make your investment profitable in the long run.