Shopping for a new home is an exciting experience. You get to choose where you want to live, the style of home you want, and the neighbourhood you want to reside in. The process of saving for your new home, however, can sometimes take away from all this excitement. Estimating costs, budgeting, and conscious spending often represent the unglamourous and even stressful aspects of your saving journey. To help relieve some of this stress, we’ve compiled a list of the top mistakes homebuyers make when saving for a house. By avoiding these mistakes, you can make your home-buying experience what it should be: exciting!
Mistake #1: Underestimating how much to save for a down payment
In the rush of excitement of buying a new home, it can be tempting to save the bare minimum for your down payment. Avoid this temptation! Buying a home with a minimum down payment is a sure-fire way to ensure that the saving stress you feel before purchase continues long after you’ve moved in. Saving 20 per cent of the total house price is usually the recommended benchmark for a down payment. However, you must decide which percentage is right for you. Ultimately, you should save enough for your down payment so that your monthly mortgage fee is affordable and allows you to embrace the excitement of the buying process. You can read more about how much to save for a down payment in my blog post from June.
Mistake #2: Forgetting to account for closing costs
Another common mistake made by young homebuyers is forgetting to account for closing costs. Closing costs are fees paid when the title of the property is transferred to the buyer. They include, but are not limited to, legal fees and land transfer taxes. PST on mortgage default insurance should also be included if you are purchasing with less than 20 per cent down. Homebuyers need to account for closing costs in addition to the down payment itself. A general rule of thumb is that buyers will typically need to budget for 1.5 per cent of the purchase price for closing costs. However, other factors such as type of home, taxes, and the age of the home can affect the total amount of closing costs.
Mistake #3: Forgetting to account for ancillary fees
Once you’ve saved enough for an affordable down payment, you can go ahead and purchase that new, amazing home. Right? Not quite. One of the top mistakes people make when saving is failing to account for their future monthly fees. Mortgage payments, hydro, cable, and internet are all new expenses you’ll have to cover each month. You don’t want to realize after moving in that you can’t afford to live in your home! Therefore, when building your savings plan, it is important to consider the new fees you’ll have to cover each month. In making sure you can afford your monthly fees, you’ll be able to spend your disposable income in ways that help you to enjoy your new home rather than have the burden of expensive homeowner bills.
Mistake #4: Leaving high interest debts
Saving for a home becomes a lot harder when you are also focused on paying outstanding debts. Although it can be unrealistic to pay off all your debts, it is best to pay off those with the highest interest as quickly as possible. By paying off high interest debts firsts, you can ensure you’re putting away the most money for your new home.
Mistake #5: Forgetting to consider a reverse mortgage
For homeowners above the age of 55, a reverse mortgage is a great way to help supplement savings for a new home. A reverse mortgage is a loan where the amount received is a certain percentage of the value of your home. By taking out a reverse mortgage on the home you are buying, you avoid having to make mortgage payments and will solely have to save for your down payment. Instead of paying your monthly mortgage fee, you would make a payment once the loan is due, or when you are able, thereby giving you more time to save. Reverse mortgages are a great option for those with limited budgets and who do not have existing loans secured to their home.
No matter what, saving for a new home will bring its ups and downs. Avoiding these common mistakes, however, is a great place to start in making your saving process as enjoyable as possible. For those looking for some more specific advice on saving for a house, or ready to begin the purchasing process, you can book a free consultation here or give me a call anytime!