Whether you’ve owned your home for several years or you’re just taking the plunge into homeownership, a few wrong moves can send your personal finances into a tailspin.
Talk with anyone who owns a home, and most people will tell you that ownership is no walk in the park. They may love the stability and perks that come with owning, such as the freedom to decorate how they please and make home improvements. But at the same, homeownership might trigger a few horror stories – mostly financial.
A home purchase is by far the biggest investment you’ll make. And not only because you agree to pay a bank a ton of money.
A house is going to cost you – no question about it. There will always be expenses can arise at the worst times, and to keep your house in good shape, you’ll have to shell out cash. But with careful, smart planning, a house doesn’t have to drain your bank account – providing you can avoid these three common housing mistakes.
Mistaken #1: Saving Just Enough to Cover Closing Costs and Down Payments
If you’re interested in buying a house, you may work hard and save diligently for closing costs and your down payment. This is very commendable. But just because you have 3.5% to 5% for a down payment, as well as 2% to 5% for closing costs, doesn’t mean you should run out and apply for the first mortgage you can find.
Yes, you technically have enough to get the keys to a new place. But what about after you’re in the house? If you blow all your money on purchasing the house, there isn’t anything left to survive unexpected expenses, such as a job loss and illness.
Understandably, you’re eager to buy a house. However, a better, smarter financial move is to save money for your down payment and closing costs, plus a little extra. You can never go wrong with at least a three-month cash reserve.
Mistake #2: Overextending Your Budget
Maybe you know the importance of getting a pre-approval when buying a house. But did you know that mortgage lenders can be wrong? Based on a mortgage lender’s pre-approval letter, you may qualify for a certain mortgage amount. On paper this works, but after a close evaluation of your expenses, you may question whether you can really afford to pay this much.
If you’re pre-approved for more than anticipated, you may welcome the offer with open arms and go out and buy the biggest, baddest house you can afford. But a house isn’t a pair of shoes or an electronic device. If you splurge on a house purchase and overextend your budget, you run the risk of being house poor and having little – if any – disposable income for extras, such as savings, vacations, utilities and food.
Mistake #3: Skipping the Home Warranty
A home warranty can cost as little as $400 a year, yet it’s an expense that many homebuyer’s skip.
If you’re not familiar with these plans, a home warranty is essentially a supplementary insurance policy that covers home repairs, such as a leaky pipe or broken appliance. Purchase a yearly policy, and if anything in your house breaks, the home warranty company will send a technician to your home to fix the problem.
There’s a small fee for each service call, between $50 and $75. If the technician can’t fix the problem, your home warranty plan covers the replacement cost.
Over the past three years that we’ve had our home warranty plan we’ve received a new garbage disposal, a new thermostat and a new air-conditioning compressor. Not to mention we’ve had technicians come to the house on two separate occasions to service our hot water heater and correct a plumbing issue – and each trip only costs $50, plus the cost of the home warranty. But considering how an air conditioning compressor alone can cost upwards of $1,200 – we made out pretty well.