How to Develop a New Home Budget

“How much home can I afford?” It's a question that anyone looking to pick up a new mortgage has to ask themselves. Luckily, determining your new home budget isn’t difficult. Here is a look at some of the homeownership costs you might face when deciding to buy a new home.

Mortgage Calculators

Mortgage calculators are popular tools and they are a good place to start when trying to decide, “How much home can I afford?” Before you use a mortgage calculator though, there are a few things that you will need to determine.

Down Payment

You typically want to put at least 20 percent down for a down payment. In fact, about half of new homeowners put down at least 20 percent. That’s a good thing to know if you’re trying to buy in a more competitive market. Of course, there are other down payment options, so you don’t have to put down 20 percent, but it’s helpful in a few ways. First, it reduces some of the risk for home lenders. Because of this, it means you’ll likely be able to get a more competitive rate on your home loan.

A larger down payment also strengthens your offer by assuring the seller that you're on solid financial ground and your financing is likely to go through.

What should you do though if 20 percent is outside your window of homeownership costs? If you have a really strong credit score, it might be fine for you to put down less. Using a mortgage calculator could help you determine this. But, be prepared, putting less money up front will make your monthly payments higher. With that in mind, even if you can afford the higher monthly payments, to keep a healthy new home budget you might want to consider a lower home purchase point.

Monthly Expenses

You’ll also need to know your monthly expenses to use a mortgage calculator. What does that include? Consider this. If you put every expense you incurred every month, for a year, on the same credit card—how much would you owe on that card?

Some monthly expenses are more obvious, like utilities and the internet. But don’t forget about smaller things like your cell phone bill, monthly streaming services, groceries, and the cost of going out. It might also be tempting to think that you will cut back on some of these expenses, once you’re a new homeowner. But be realistic. It’s best to determine a new home budget on your actual expenses, and not based on an ideal budget that you’ve yet to achieve on a regular basis.

Credit Score & Loan Terms

The last things you’ll need to use a mortgage calculator are your credit score and an idea of how long you expect to take to pay off your loans. Many banks and credit cards now offer access to your credit score for free, or you can use a free service. Eventually, once you are applying for the actual loan, you will have to run a hard credit check. But you don’t have to do that now. Just an estimate will suffice. In addition, do you plan on taking out a 15, 20, or 30-year mortgage?

A 30-year mortgage is by far the most common, but that doesn’t mean that it’s the best route for everyone to go. This is also another reason not to make a purchase that is at the top of your new home budget. A more affordable house on a 20-year loan could save you a lot of money in the long run—especially if your plan is to pay the entire mortgage off before you consider moving again. A 20-year loan will likely carry better interest rates, so you could be paying less interest over a lesser time period. However, since your payments are condensed over 20 years instead of 30, your monthly payments will be higher.

Home Ownership Costs

Once you have determined your mortgage expenses, you will want to do an evaluation of different home ownership costs. There are a few costs related to homeownership that you might not be aware of—especially if you are a first-time homebuyer. Here are a few things to keep in mind.

Home Owner’s Association Fees (HOA)

If you live in a community or condo, you’ll likely end up having to pay HOA fees. These fees range, depending on the services provided. Be mindful though that these costs will never go away. Similar to paying rent, even when you’ve paid off your mortgage you will have to factor in HOA costs. And HOA costs often increase over time. Want to understand more about HOAs and what they offer? Check out our article: "What is an HOA?"

Property Taxes

As a part of homeownership costs, you’ll have to pay property taxes. These funds will typically be taken out monthly by your loan provider and held in escrow to pay your property taxes in full at the end of the year. These taxes can be as much as just over two percent of your assessed home value. It’s another number that often goes up, also. Your state will assess your home yearly to determine its value and set taxes based on that number. And while it’s a great feeling to know that your home is appreciating in value, you should also understand that your property taxes will increase along with it. If you’re interested in learning more, we have a helpful article “How Do Property Taxes Work?” that helps to explain this home ownership cost.

Closing Costs

While you might feel confident about the amount of a down payment you have, be careful to figure in closing costs. These costs range by state and situation. For example, you can pay for mortgage points to lower the interest rate on your loan. This is optional and could save you money in the long run, but it will set you back upfront. Other closing costs might pertain to agent and lawyer fees, tax and title work, and more. You could end up paying zero closing costs, or you could end up paying over $10k in states like Washington, DC, and New York. A more likely range is $2k to $5k. While the cost may vary, having a good understanding of your closing costs will help to make the whole home buying process simpler and less stressful.

Establishing a new home budget can be a little involved, but it’s not too difficult a task. And while homeownership costs can be intimidating, having your info ready to plug it into a mortgage calculator can ease the process. In the end, the opportunity to own a new home is incredibly rewarding. And if you’re working with new home builders, the ability to make personalization can truly make a brand new house feel like home. If you’re intimidated by the process in general, consider working with new home builders who can make the home buying process easy like Pulte Homes.

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Published 11.23.2021