I’ve been thinking about budgets a lot lately. And the idea that a budget is (or should be) just a list of financial priorities. What’re the most important things? The folks at You Need A Budget (YNAB) have captured this concept beautifully.
Priorities: Do you really want to buy a house? Or is the new Ford F-150 double cab super-duty more important? Which one will provide more long-term happiness? Which one is a better investment? Some questions to think about…especially considering the crazy amount of money you can spend on cars and trucks these days.
Understanding that our vehicles can be emotional attachments, my tip #1 is still … go easy on the vehicles!
Pay more now to save later
Tip #2 … avoid Mortgage Insurance … if you can. In some cases, especially in a crazy rental market, it still makes sense to purchase a home even if you are required to pay mortgage insurance. So, when do you need to pay either PMI (private mortgage insurance) or MIP (the FHA Mortgage Insurance Premium)?
Any time a borrower makes a down payment of less than 20 percent, PMI (or MIP) will be required as an additional fee on your monthly payment. It can add a big chunk. We’ll use the median home price nationwide for the following scenario…
…If you use a 30-year, FHA-backed loan at 3.750 percent interest to purchase a home for $250,000, and offer a down payment of $8,750, your MIP will be about $170.00…per month.
If possible, take the time to save more money so that you can pay a 20 percent down payment, and you’ll skip that MIP or PMI monthly premium every month. In the above example it would save $2,040.
But there’s more: With a 20 percent down payment, you not only ditch the mortgage insurance requirement but, because the loan amount is smaller, your monthly payment will be significantly less as well. In our scenario you’d save nearly $500 per month on your house payment.
So, going back to the crazy rental market … it may make sense to pay PMI and buy instead of continuing to rent. Especially if rents are rising faster than home prices. Do the math (or let your agent do the math) … the monthly payment including Principal, Interest, Taxes, Insurance … AND PMI, could be less than the monthly payment on an equivalent rental property. And the advantage of buying is that you lock in your payment. Rents tend to keep moving upward. Especially in Colorado Springs.
Build sweat equity
Ok, so not all everyone can come up with a $50,000 down payment on a $250,000 property. For those with little savings, buying a fixer home may be the answer. Nationwide, fixers are priced an average of 8 percent less than market value, according to a Zillow analysis.
The drawback to buying a home that needs work is that, since you have a tight budget, the renovation work could be piecemeal, on an as-you-can-afford-to-make-repairs basis. Some buyers aren’t bothered by this prospect, especially if there isn’t a lot of work to be done.
If you are among them, fixers can be an ideal way to get into homeownership for a lot less money than you’d pay for a turnkey home. And eventually, you’ll have a home that’s customized to your lifestyle and taste.
All those nickels and dimes add up
There are several “legs” to your monthly mortgage payment and a big chunk of it goes into an escrow fund to pay for your insurance and taxes and, sometimes, your homeowner association (HOA) dues and fees.
In fact, if you’re an “average” American, and you live in a managed community, your HOA fees, taxes and insurance add nearly $600 to your house payment each month. Thankfully there are ways to cut that number and stretch your home-buying dollars.
HOA fees are on the rise, nationwide. In a recent Trulia study, these fees outpaced home-price growth and now average $331 a month. If you don’t mind doing your own exterior home maintenance, seek out a home that isn’t in a managed community. Your mortgage payment will be a lot easier to swallow if it’s $300 less.
Next, consider homeowner insurance. The average annual premium, nationwide, is $964, according to Value Penguin. The Insurance Information Institute offers several ideas on how to whittle down the cost of insurance.
In a nutshell, you can ask for a higher deductible, install security features and take advantage of discounts, such as those for seniors. Shop carefully and compare policies among several insurers.
Wallet Hub’s John S Kiernan claims that “The average American household spends $2,149 on property taxes.” That’s a bit more than $179 per month.
Interestingly, few homebuyers research a home’s property taxes before deciding to purchase. It’s easy to do – many assessor’s offices have tax information online. And in Colorado Springs, the MLS information also includes tax information.
“Buyers also should find out whether a home may be subject to multiple property tax authorities. Not only states, but also counties, cities and special districts, such as local water, sewer or school authorities, may wield such powers,” according to bankrate.com’s Marcie Geffner.
While a tight budget doesn’t preclude one from buying a home, finding ways to stretch a limited budget may allow you to purchase more home than you thought possible. At the very least, taking cost-saving measures will help lower your monthly payment.
The above post “Tips to stretch your home-buying dollar” was provided by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page. To get a complimentary home valuation click HERE.
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