Buying a new home is often the biggest financial commitment a person will ever make. Having a home means putting down roots with the possibility of expanding your family. If you own a home, then you know that ownership comes with a lot of excitement and a whole new level of responsibility.
In general, more financial stability will be necessary to meet your financial commitments. As fulfilling as homeownership can be, it’s important to understand the effect it will have on your finances in the years to come.
Mortgage vs Rent
Unless you paid in cash, that lovely home comes with a new expense you’ll have to pay every month. A mortgage is similar to rent, except that you’ll be paying off a bank loan instead of making payments to your landlord. However, paying for a home is an investment in something that has potential to grow in value and that you can fully own someday.
While homeownership is a strong tradition in Chicago’s south suburban communities, many Americans struggle to pay off their mortgage. If you’re unable to pay your rent, it’s much easier and less costly to relocate to a smaller apartment. The mortgage won’t go away even if you experience a major life event, such as a job loss or a health condition that changes your family’s financial circumstances. Once people fall behind in their payments, it can be hard to catch up.
Budgeting Is Essential
Let’s say you’re all moved in. You just used up a huge portion of your savings on the down payment and moving expenses. If you didn’t budget before, you will now. A budget will help your household account for the additional expenses that come with your new address.
Typical budgeting expenses include:
- Mortgage. The biggest expense will likely be your monthly mortgage payments.
- Interest. Mortgage payments come with interest that is higher in the earlier stages. The average rate for a 30-year fixed-rate mortgage is around 4 percent. Short-term mortgages have lower rates.
- Property Taxes. Illinois is known for its high property taxes. Cook County has an average property tax rate of 2.10 percent. If your home cost $200,000, you could be looking at more than $4,000 annually of property taxes. That’s an additional $350 you’ll have to set aside each month.
- Homeowners Insurance. Your lender will likely require that you get homeowners insurance. According to Bankrate, insurance premiums on a $250,000 home can run between $923 and $1,500 annually.
- Utilities. It’s your turn to be the landlord. Added expenses can include the cost of electricity, water, pest control, garbage collection, and internet service.
- Maintenance and Repair Costs. You’ll have to budget for the cost of air filters, HVAC tune-ups, and unexpected repairs on the home itself.
- Possible Homeowners Association (HOA) Fees. HOA fees are typically required in condos and townhomes, although some single-family homes are also part of associations. The fees cover the cost of maintaining things like building lobbies, common areas, elevators, and landscaping.
In other words, budgeting can get a lot more complicated. When you have a home, building your savings is more important than ever.
Impact on Credit Score
Because you owe a large debt, your credit score will initially drop. A credit score of over 700 is considered good, and it could drop between 10 and 40 points. A lower score can temporarily affect your ability to take out other loans.
But your score will rise again as your mortgage is paid off. Making consistent mortgage payments will eventually have a positive influence on your credit score. Demonstrating your ability to pay off a long-term loan like a mortgage is one of the best things you can do for your credit history.
You Might Eventually Sell
People are moving out of their homes more quickly than before. That might not matter now, but as homeowners start to think about moving, they also become aware of the costs associated with it. As with moving, selling comes with many expenses, such as painting and last-minute repairs. Remodeling may not be necessary, but it’s a step that many people take to improve their home’s curb appeal and get a better offer.
So, if you plan to settle in to a new home, it’s a good idea to keep an eye on the long game. In this country, homeownership usually isn’t for forever.
Whether you have a home or simply want to get your finances in order, find the nearest South Suburban Currency Exchange location. Our staff can handle all of your financial needs.