The only thing worse than not being able to buy a home when you want to is owning a home and not being able to do anything but sit inside because after your house payment, HOA fee, taxes, and household bills, there’s nothing left.
A few smart strategies can help you avoid becoming house poor.
Think hard about that preapproval amount
Just because the bank tells you that you can buy a $400,000 home doesn’t mean you have to spend all $400,000. It might be that you’re not comfortable with a payment that high if it means you won’t have a cushion and can’t continue to contribute to your savings.
Things you’ll want to consider:
Can you continue to invest the way you want to?
Will you be able to keep up (or build) your emergency fund – “A savings account stuffed with six months expenses or more is a vital part of financial stability,” said Money Under 30.
Are you going to have enough money left over to establish a bank account buffer? “Whether you’re 15, 25 or 65, if you’re having trouble with your money and want to improve, the very first step you should take is to build a bank account buffer,” said Money Under 30. “A bank account buffer is my name for what other people may call a cash cushion, mini emergency fund, rainy day fund or back-up savings. When you have a bank account buffer in place, you don’t have to worry that a poorly timed Starbucks break you charged to your debit card will overdraw your account and trigger a $35 overdraft fee.”
Calculate your ENTIRE payment
Principle and interest will only tell you part of the story. Same with principle, interest, taxes, and insurance. If you’re not also taking into account any Private Mortgage Insurance you need to pay, your Homeowner’s Association fee, and any special assessments, you’re not looking at the whole picture.
Budget for additional expenses
This is not the place for that buffer referenced above, but, rather, a way to make sure you can really handle the home you want without living paycheck to paycheck or, even worse, going into even more debt just so you don’t sink. If you don’t currently have a yard or are renting, you may not be accustomed to paying landscaping fees. If your new home has a pool, don’t forget to budget for that pool cleaner. If you’re moving to a larger home, you may also have an increase in costs for your house cleaning service and utilities, and if your commute is longer, you may be paying more in gas and tolls. They are the little things that can creep up and affect your bottom line.
Don’t do improvements right away
You might want to wait a few months to see how your expenses pan out before you empty your savings on a new kitchen. Ditto for buying a houseful of new furniture. The desire to fix up the house to your standards or pack it with all-new everything is strong. But a little patience can go a long way. Spreading out your purchases while you increase your savings and waiting for sales and zero interest credit offers can help keep your budget in check.
Be careful with an equity line
Having equity in your home is great if it means you made a smart investment. But using it irresponsibly can quickly make your budget spin out of control. The good news is that, according to CoreLogic’s MarketPulse, the number of homeowners who are under water is dropping – now about a third of the 2010 total. The bad news is that equity can be tempting, and stripping your home of it—and making not-so-smart decisions with the money – can create an underwater situation. If you take out a line with the intent on doing some updates or renovations, you’ll want to make sure that you can comfortably afford the new payment and that the renovations you’re making will provide a return on investment.
Get a home warranty
Experts are on the fence about this—some say you absolutely have to have one while others find it a waste of money. But if you’re the type for whom coming up with thousands of dollars to replace the faulty air conditioner that’s no longer conditioning anything or a refrigerator that’s stopped refrigerating will be a hardship, the minimal monthly output is far outweighed by the peace of mind of knowing most of your large repairs will be covered.
Claim a homestead exemption
In some states, you can file a homestead exemption to lower your property taxes. Savings can add up to hundreds of dollars per year or more. You can get more information and learn who’s eligible here.
Change your tax withholding
One of the great benefits of homeownership is the tax write off. If you leave your withholdings alone, you may expect to get a big chunk of money back at the end of the year, as long as nothing else has changed. But by adjusting your withholdings, you can hold on to more of your money every month to help offset higher expenses.
After you buy a home, “payroll withholdings should also be reexamined and, perhaps, reduced to account for the reduction in net tax liability,” said HGTV. “Talk to your tax preparer or use the IRS withholding calculator, to get the numbers right.”