Ready to buy a home? Here’s a budget planner…
Buying a home is something that you may want to consider carefully with a very clear plan and strategy. This plan should have clearly defined steps to follow and you should follow them thoroughly. Before jumping head first into a purchase, this analysis can help you avoid future headaches and difficulties. The realtors, the sellers or the banks are not good sources for this consideration. This is a personal decision and you should carefully consider it in detail.
The basics
First, think about setting a sufficient amount of money for your down payment. The minimum requirement to put down is at least 5%. If you are able to strategically set aside enough money for a 10 or even a 20% for the down payment, this could prove a strategy that will save you lots of interest and improve the home you could get.
Understanding your spending pattern from month to month is important as this will definitively help you plan for purchasing your home.
After you purchase your home, there will be additional monthly expenses. If you know your spending pattern, it will be far easier to be prepared for these additional costs on a monthly basis.
Most people save less than 5% of their income. To buy a home, you need to be able to save over 5% of your income. To do this, you first need to put everything down in paper. Every expense and all income sources, this will not only help you plan a budget, but it will also help you with your taxes when the time comes.
Understanding your spending pattern
To understand your spending pattern, you need to review at least the last 3 or 4 months income and expenses. This will give you a very good idea of what is your way of spending. Include all your household income and expenses.
To achieve this, just create a list of all your income and expenses. This Budget Planner is an XLS file that will help you in the calculation.
Managing your budget – Living fully within your limits
To save money for a new house and for having an easier life in regards to money, you need to gradually take control of all your expenses and trim what is excessive. Reducing your monthly expenditures will also come in handy after purchasing your home to allow you to afford other costs involved with home ownership.
As usual, the first things to work on are your current balances on credits (auto, credit cards, and other loans). It is wise to strongly reduce or completely eliminate these expanses as possible. The main reason is that interests accumulated and paid for these balances is usually high and not tax deductible.
One way of relieving yourself of debt is by using your savings, if you have some. What you earn in interest from the savings accounts very likely does not compensate for the interest you are losing on your debts, plus the interest earned in your savings is taxable (with exception of the Tax Free Savings Accounts – TFSAs). Before you do this, ensure that you have access to emergency funds from family or friends.
Another option, in case you cannot pay off your debt, is considering looking into getting lower interest rates to refinance all of your debt. And once you’ve done this, try reducing your spending in order to use your savings to pay your debts. And when possible, close your credit card accounts. I know it’s hard, but credit cards are money wells and with a good budget planning, not really necessary.
After you’ve dealt with debts, go over your spending list and trim down items that are not necessities. Focus your spending on value. Little changes can add up to become great savings.
After analyzing your spending habits, there are 3 possible conclusion you may end up having:
Too much: After analyzing your habits, some people realize how little luxuries add up and become huge expenses. At this point, you must consider trimming down all those little luxuries so you can get in budget and save for your dream home.
Just enough: You are smart with your money and you manage to save enough each month. This excellent as puts you closer to your goal. Just consider that after your home purchase there might be additional expenses to deal with.
Supersaver: You are one of those rare people who manage to save a lot of your earnings and this usually means that you can stretch your expenses on a house and very likely, borrow more money than you thought.
So, how much do you need to save?
The answer for this question is tricky. It is important to consider saving money for other things besides the home. It is wise to have at least three months worth of living expenses in a TFSA at all times as a minimum. Before purchasing your first home, it is important to have money saved for other necessities. If you know your saving goals and have a clearly defined plan you should be able to purchase a home faster and better.
It isn’t necessary to know exactly what you are going to do for the next 20 years, it is just about having an idea of what you want. Even if you don’t want to retire, you should leave some money aside just in case.
The Down Payment
It may be daunting to set aside 20% of your dream home cost for a down payment. But, you may be able to save enough for 5, 10, or 15% and still be in good shape.
Besides the home principal, you should also consider other costs, like home inspections (never purchase without one), renovations that may be needed and very important, the closing costs. These costs vary depending on different factors, but it should be safe considering about 4,000 dollars in closing costs and taxes.
If you need more information in regards to all the expenses related to purchasing a home and methods for obtaining a favourable credit, contact a mortgage specialist like myself. I would be very glad to help you reach your dreams.
