Buying a home is a big decision—and it’s one that requires you to know exactly how much money you’ll have to spend.
If you’re buying a house, you’ll need to know your budget.
But where do you even begin?
How to Set Your Home-Buying Budget
Before you apply for a mortgage, you’ll need to figure out how much you can afford in a monthly payment. Talk to your lender about your loan amount, and find out whether they’ll be able to create that kind of financing plan for you.
So what should you include in your budget?
PITI (principal, interest, taxes, and insurance). When you use a mortgage calculator, it’ll show you how much you’ll pay in principal and interest—but it won’t include property taxes and homeowners insurance. Even if your lender doesn’t add these into your monthly payment, it’s a good idea to know exactly how much you’ll spend.
How much cash you’ll need at closing. You’ll have to pay a down payment and closing costs when you purchase your home. There are some exceptions, such as when you’re using a VA loan and the seller pays your closing costs for you, but most people need to put down between 5 and 20 percent of a home’s purchase price. Closing costs can range between about 3 and 7 percent of the total loan amount, and they’ll include charges such as loan origination fees, title insurance, and appraisal fees.
Money for private mortgage insurance. If you’re putting down less than 20 percent of your home’s purchase price, you’ll most likely need to pay for private mortgage insurance. (Again, with a VA loan, this is different—you don’t pay PMI with a loan backed by the Veterans Administration.)
Cash for utilities. Some utility companies require credit checks and deposits before they’ll turn on your electric, gas, or water, so it’s a good idea to find out how much those are well in advance—and to plan for the bills if you’re moving into a larger space.