a Monday closing by same-day wiring the funds for an afternoon closing.)
❯❯ Other fees: Recording fees (to record the deed and mortgage), courier and express mailing fees, notary fees – you name it. These extra expenses usually total about $200 to $300. Note: Ask your mortgage lender for a complete listing of all fees and charges.
In addition to costing you a monthly mortgage payment, homes also need flooring, window treatments, painting, plumbing, electrical and roof repairs, and other types of maintenance over time. Of course, some homeowners defer maintenance and even put their houses on the market for sale with lots of deferred maintenance (which, of course, will be reflected in a reduced sales price that is often much greater than the cost to have made those simple repairs).
For budgeting purposes, we suggest that you allocate about 1 percent of the purchase price of your home each year for normal maintenance expenses. So, for example, if you spend $240,000 on a home, you should budget about $2,400 per year (or about $200 per month) for maintenance.
With some types of housing, such as condominiums or planned unit developments (PUD), you pay monthly dues into a common interest development (often referred to as a homeowners association), which takes care of the maintenance for the community. In that case, you’re responsible for maintaining only the interior of your unit. Check with the association to see how much the dues are currently running, anticipated future monthly or quarterly dues increases or special assessments, what services are included, and how they’ve changed over the years.
In addition to necessary maintenance and furnishings, also be aware of how much you may spend on nonessential home improvements, such as adding a deck, remodeling your kitchen, and so on. Budget for these nonessentials unless you’re the rare person who is a super saver, can easily accomplish your savings goals, and have lots of slack in your budget.
The amount you expect to spend on improvements is just an estimate. It depends on how finished a home you buy and your personal tastes and desires. Consider your previous spending behavior and the types of projects you expect to do as you examine potential homes for purchase.
Consider the Impact of a New House on Your Financial Future
As you collect your spending data, think about how your proposed home purchase will affect and change your spending habits and ability to save. For example, as a homeowner, if you live farther away from your job than you did when you rented, how much will your transportation expenses increase? If you currently don’t live in a common interest development (that is, a community with a homeowners association), you’ll quickly learn about dues and sometimes special assessments, which are rarely anticipated and included in your budget.
Table 1-2 can help you total all your current expenses and estimate future expected spending.
TABLE 1-2 Your Spending, Now and After Your Home Purchase
Tabulating your spending is only half the battle on the path to fiscal fitness and a financially successful home purchase. After all, many government entities know where they spend our tax dollars, but they still run up massive levels of debt! You must do something with the personal spending information you collect.
When most Americans examine their spending, especially if it’s the first time, they may be surprised and dismayed at the amount of their overall spending and how little they’re saving. How much is enough to save? The answer depends on your goals and how good your investing skills are. For most people to reach their financial goals, they must annually save at least 10 percent of their gross (pretax) income.
From Eric’s experience as a personal financial counselor and lecturer, he knows that most people don’t know how much they’re currently saving, and even more people don’t know how much they should be saving. You should know these amounts before you buy your first home or trade up to a more costly property.
If you’re like most people planning to buy a first home, you need to reduce your spending to accumulate enough money to pay for the down payment and closing costs and create enough slack in your budget to afford the extra costs of homeownership. Trade-up buyers may have some of the same issues as well. Where you decide to make cuts in your budget is a matter of personal preference. Here are some proven ways to cut your spending now and in the future:
❯❯ Purge consumer debt. Debt on credit cards, vehicle loans, and the like is detrimental to your long-term financial health. Borrowing through consumer loans encourages you to live beyond your means, and the interest rates on consumer debt are high and not tax deductible. If you have accessible savings to pay down your consumer debts, do so as long as you have access to sufficient emergency money from family or other avenues.
❯❯ Trim nonessential spending. Although everyone needs food, shelter, clothing, and healthcare, most Americans spend a great deal of additional money on luxuries and nonessentials. Even some of what people spend on the “necessity” categories is partly for luxury.
❯❯ Purchase products and services that offer value. High quality doesn’t have to cost more. In fact, higher priced products and services are sometimes inferior to lower cost alternatives. With so many products available online these days, and local bricks-and-mortar stores willing to price match, a little research can go a long way to finding real savings.
❯❯ Buy in bulk. Most items are cheaper per unit when you buy them in larger sizes or volumes. Superstores such as Costco, BJ’s Wholesale Club, Sam’s Club, Target, and Walmart offer family sizes and competitive pricing.
Most people find it enlightening to see how much they need to save to accomplish particular goals. For example, wanting to retire while you still have good health is a common goal. And the good news is that you can take advantage of tax incentives while you save toward retirement.
Money that you contribute to an employer-based retirement plan – for example, a 401(k) – or to a self-employed plan – for example, a SEP-IRA – is typically tax deductible at both the federal and state levels. Also, after you contribute money into a retirement account, the gains on that money compound over time without taxation.
If you’re trying to save for a real estate purchase and save toward retirement and reduce your taxes, you have a dilemma – assuming that, like most people, you have limited funds with which to work. The dilemma is that you can save outside of retirement accounts and have access to your down-payment money but pay much more in taxes. Or you can fund your retirement accounts and gain tax benefits, but lack access to the money for your home purchase.
You have two ways to skirt this dilemma:
❯❯ Borrow against your employer’s retirement plan. Some employers’ retirement plans, especially those in larger companies, allow borrowing against retirement savings plan balances. Some companies offer first-time homebuyers a little financial assistance, so make sure you ask. Because you are borrowing your own money, the monthly payment (including interest) all goes back to your account.
