“The only thing certain in life is uncertainty” -Derek Hough
With all the uncertainty in life, it can sometimes feel as though you can’t always plan ahead, but that’s rarely the case. In fact, with your finances you can actually plan ahead in a manner that will allow you to move forward with a goal should you want to in the future. We do this all the time with our clients and find that no one’s ever upset if they’re over prepared financially. It’s definitely better than the alternative.
This post is the first in a series about preparing financially for five BIG life events. First up:
Buying a House
If there’s any chance that you might eventually move from your current living situation into another home that you will own, then it’s worth planning for. There are expenses to consider before you move and once you’re settled, but realizing your dream can be possible if you think it through first. It’s never too early to consider the following:
Your Down Payment
While a 20% down payment isn’t required, it’s still considered a best practice and in such a competitive market, it could give you an advantage. Here are some questions to consider for your own situation:
What amount will you need?
Will you fund the down payment through out of pocket savings or equity in your current home or a combination of both?
In doing so will you be able to maintain the appropriate emergency fund?
New Monthly Payment
Beyond the purchase price, there are many ‘hidden’ expenses that you should factor into the final, true cost of buying a home.
Will the home be an upgrade and if so will this upgrade require more money each month?
Have you considered your total monthly payment including the mortgage loan, real estate taxes, association fees, utilities, etc.?
Will the property be assessed again soon? Will new property taxes be associated with this purchase?
Newly built homes are often assessed on their pre-finished value. Once the home is complete, the home’s value will be reassessed. Make sure you have savings for an increase in property taxes.
How will these new expenses affect your current lifestyle?
Will you still be on track to afford your other savings and spending goals?
Debt Considerations
Your debt-to-income ratio is the total of all monthly debt payments divided by your gross monthly income. This is one way to measure your ability to manage the monthly payments. Generally, a 43% ratio is the limit for someone to successfully manage their debt.
How will this new debt impact your financial picture?
Consider your credit score. What’s your score before the purchase and what do you expect it to look like after the purchase?
Are there any additional debts that you’re planning to accrue as a result of this purchase, such as a loan for renovations or furnishings?
If it’s a new build, there may be hidden costs, such as window treatments and appliances. Decks, fences and landscaping may also not be included.
Can these additional debts be avoided and can you instead fund these purchases with cash?
Lastly, how long will you carry this debt(s)? Are there ways to pay off your debts sooner?
Buying a new home is a BIG life event and preparation can be the key to success. We’ll be covering other life events here over the next couple of months including: Job Transition, Marriage, Children, and Retirement/Career Break. CLICK HERE if we can help you prepare for the BIG moments in your life.