Budgeting to Buy Your First Home

Excited young family moving into new home.

Are you contemplating the leap into homeownership? While living in an apartment or staying with family can be financially savvy, buying a house often represents the pinnacle of stability and security for many. But before you envision yourself in that dream home, it’s crucial to prepare yourself financially and mentally. One of the first steps to buying a house is ensuring you have the finances to support your dream. Follow these steps to create a budget for buying a house with current high interest rates in mind.

Start researching your home purchase early

Are you looking to buy your first home? Start your research well in advance of when you’re hoping to make the purchase. Get familiar with the housing market in your desired location. How important is location to you? Size? Accessibility? What are elements you won’t negotiate on?

As you begin to weigh these features against potential costs, you’ll get a much better sense of what you need versus what you want out of your first home. You’ll also really begin to see how much you’ll need to start saving for a home.

Set a spending cap and home buying budget

You may not need to pay a significant down payment on your new home, but the more cash you can bring to closing, the better off you’ll be. You’ll have more flexibility when it comes to mortgage terms, and if you have at least 20%  of the home’s value available as a down payment, you can avoid costly PMI (Private Mortgage Insurance) payments.

Keeping this in mind, setting a spending cap is key. You want to ensure that you don't overextend yourself financially, spending a significant portion of your income on mortgage payments, leaving little room for other expenses or savings.

By understanding your spending threshold, you can decide how much you’ll need for a down payment, which will then allow you to start planning out your house budget. Additionally, knowing that you have saved diligently for your home purchase can reduce the stress associated with homeownership. You'll have confidence in your ability to manage mortgage payments and other expenses, leading to a more positive experience when buying your first home.

Calculate monthly homeownership costs

As part of your home buying budget, you’ll need to understand your ongoing expenses. The last thing you want to do is to buy your dream home only to discover that you can’t actually afford it on a monthly basis. Here are important factors to keep in mind as a first-time home buyer creating a house budget:

Property taxes

This is one of your most significant costs, and it can catch you off guard if you aren’t prepared for it. Property taxes vary wildly depending on where you live, so you’ll want to do your research. This calculator from Smart Asset can give you a rough estimate of your yearly tax bill based on ZIP code and home value.

Homeowners’ insurance

Your homeowners’ insurance premium will depend on a range of factors from the age of your home to the type of materials used to build the home. It can be difficult to get an accurate estimate without speaking directly with an insurer but this list of average premium prices across all 50 states is a good starting point. Just keep in mind that if your home is in a flood-prone area, you’ll likely have to purchase additional flood insurance.

Energy and heating bills

You’ve likely paid energy bills before, but keep in mind that a house usually costs more to heat and power than an apartment. An exact number can be tricky to pin down ahead of time, since it depends so much on your plan details and usage rates. Your best bet may be to check with utility companies in your target area to see if they have cost calculators available, like this one from Reliant. If you’re an outgoing person, you could also just ask someone in the neighborhood how much they spend on heating and energy.

Home repair

A good rule of thumb is to set aside one percent of the value or purchase price of your home each year for potential repair costs. Of course the likelihood of your home needing repairs changes greatly depending on the home’s age and location, so if you’re buying an old home or a fixer-upper, you’ll want to prepare for a bigger spend.

Consider additional expenses

Will you need a new couch or bed frame when you move into your first home? Don't overlook the need for furniture, appliances, and other essentials when moving in. Factor these costs into your home buying budget alongside your down payment and monthly expenses to ensure a smooth transition.

Train yourself to live on your house budget now

Once you understand the upfront and ongoing costs of homeownership, you’ll be able to plot out a budget that saves you the necessary amount of money and prepares you for the monthly costs of owning a home in advance of making the purchase. Luckily, the two objectives can go hand-in-hand.

As you work towards buying your first home, take the money you’ll eventually be spending on property taxes, homeowners’ insurance, etc. and put that money into savings – which you can then use to help purchase your home. Now you’ll have the money you need when buying your first home, plus the proven ability to comfortably manage and stay in that home!

Lean on expert advice before buying your first home

Buying a home is the most significant financial commitment most of us will take on in our lives. The change from being a renter to being a homeowner is massive, and there's no way to be too prepared for the change.

If you're thinking about making a big move like buying a home, a great first step is working with a financial counselor from MMI. We offer free credit counseling 24/7, online and over the phone.

  • Concerned about your credit score? We can help show you how to build good credit.
  • Worried you don't have enough saved? We can provide strategies for focusing on saving money.
  • Feeling hamstrung by debt payments? We can create a debt management plan to help reduce your interest rates, accelerate your debt payoff, and save you money in the process. 

Get started today and see all the different ways our experts can help you reach your financial goals.

Tagged in Advice for families, Navigating change

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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