Purchasing a home is one of the largest financial commitments most Americans will make in their lifetimes. Thankfully, there’s no need to pay for everything upfront. With the right financing plan, families can get started moving into their new homes and pay everything off over time.
What Is a Financing Plan?
Most homebuyers already know what mortgages are, but finding the right loan for a new home build is just one part of a good financing plan. The plan should also cover other anticipated and likely expenses, including taxes, home insurance, repairs, maintenance, and upgrades. Coming up with a plan before taking out a loan helps future homeowners better understand their unique financial situations and evaluate their options.
Benefits of Building a Financing Plan
Every buyer planning to build a family home should have a plan in place for handling both short-term and long-term expenses. It allows prospective buyers to get a better handle on what kinds of features and floor plans they can afford and ensures that families have enough money left over to grow and thrive after they move in.
With a financing plan, homeowners will be better able to anticipate future expenses. They’ll rest easier knowing their mortgage, taxes, insurance, and other essentials will be covered without driving them into bankruptcy. Plus, a financing plan makes it easier to tell if there’s enough money left over in the budget for voluntary upgrades.
A Step-By-Step Overview
Every family’s situation is a little different. However, all prospective buyers can follow the steps below to come up with financial plans that reflect their unique positions.
Step One: Investigate Options
Don’t head out the door to find a mortgage broker just yet. First, prospective buyers need to investigate options. Those buying new construction homes may find that they can get the help they need choosing a lender from the home building company, for example, which would make it a waste of time to investigate mortgage options for existing homes.
Step Two: Calculate Total Housing Costs
Total housing costs include not just mortgage payment, but also insurance premiums, taxes, and, if applicable, association fees. Those purchasing existing homes should also be prepared to spend money out of the gate on renovations or remodeling if it will be necessary to support the family’s safety and comfort. Buying a newly constructed home removes the need for calculating in these kinds of immediate renovations and repairs.
There are two reasons it’s so important to calculate total housing costs accurately. First, most lenders use what’s known as a housing debt ratio to determine if a prospective buyer is eligible for a loan. The total housing cost will have to be 28% or less of the buyer’s annual gross income to ensure eligibility.
Second, an accurate understanding of total housing costs gives future homeowners a better idea of how much money they’ll have leftover for other expenses. Those may be family or job-related expenses, or they may pertain to desirable upgrades to the home or property.
Step Three: Estimate Ongoing Maintenance Costs
The average homeowner spends around 1% of the home’s value on maintenance each year. That percentage is lower for new-built homes, but even buyers who have their properties built to suit will still incur maintenance expenses over time. Here are some average replacement timelines that can make it easier to estimate ongoing maintenance costs:
- Asphalt shingle roofs must be replaced every 20-25 years.
- Heating systems last an average of 15-20 years.
- Ovens have an estimated lifespan of 11-15 years.
- Water heaters should be upgraded every 8-13 years.
Step Four: Consider Additional Move-In Costs
Additional move-in costs vary substantially depending on the home buyer’s situation. Those who have always rented furnished apartments may need to purchase furniture. Families moving in from out of state will need to pay a moving company. Having a reasonable estimate of these one-time expenses makes it easier to plan and budget for moving day.
Step Five: Establish an Emergency Fund
The chances of dealing with unexpected expenses increase when renters transition into homeowners. It’s wise to have some money put aside for tackling unexpected issues. Try to put aside enough to cover three to six months of expenses, including not just monthly bills like mortgage payments, utilities, and insurance, but also basic needs like clothing and food.
Keep this emergency fund intact until there are no other options on the table. It’s not for making up the difference on an initial down payment or installing a new backyard swimming pool. It’s for weathering financial storms like recessions, the loss of a job, or unexpected medical bills.
Step Six: Keep Track of Everything
After signing on the dotted line, continue to keep track of expenses. It helps to keep a dedicated logbook. Note down everything from monthly heating, cooling, electricity, and water costs to discretionary spending. It will make sticking to the initial plan easier and ensure that no major bills go unpaid.
Why Buy New?
As future homeowners may already have noted, this article differentiates between new-built homes and existing houses. There’s a reason for that. Having a new home designed and constructed requires a higher initial investment than purchasing an existing home. However, a new build home also poses fewer risks.
Homeowners won’t have to worry about making repairs or renovations immediately after moving in. Everything will already be perfectly suited to their families’ needs. They’ll also be able to include voluntary upgrades in the initial home price and pay them off with the mortgage. For most families, it makes more sense to buy new.
Start Saving Now
Whether prospective buyers are almost ready to make the leap or they’re still years away, it’s worth setting up dedicated savings accounts and working on a financing plan now. Buying a home is a huge milestone. It takes time to get there, but with adequate planning, future buyers will be in much better shape when it’s time to start investigating properties and finding a lender. They’ll also have more options as far as hoHow to Build a Financing Plan for a New Homeme size, location, and features after saving up for a sizable downpayment.