Buying a house is a life-changing experience for many of us and, hopefully, a positive one. To make that big investment worthwhile, there are some financial considerations you must make to ensure this next phase of your life is financially secure.
To help you make the right move (literally!), let’s review some basic yet necessary financial preparations for home buying.
Rule of 28
Just about any financial literacy book out there will have an interpretation of this rule — it’s kind of a big deal. The Rule of 28 essentially states that your household expenses (e.g., principal payment, insurance, taxes, interest, etc.) should not exceed 28% of your monthly income. Some experts suggest less, but the general rule stands to protect us from over-leveraging our budgets so that there is opportunity for growth and savings. After all, who wants a fancy home when you cannot afford to decorate it accordingly?
If this rule goes disregarded, we could blindly walk into a financially draining purchase that ruins our future financial goals, lifestyles, and relationships.
Perhaps the home you want is just out of reach given your current income and savings. The Rule of 28 acts as a guide to help you make all other financial decisions associated with purchasing a home. It also helps you determine how much you need to make the math work. Don’t forget the impact that purchase has on your life after you move in too. Additional costs associated with homeownership could range from regular maintenance to damages, which typically average 1-2% of your home’s value annually.
Down Payments Help
Paying 100% for a home, while ideal, is often out of reach. That means we should focus on the next best thing: a down payment. Many loans require a down payment on a home, while others do not. Even though Veterans Affairs and U.S. Department of Agriculture loans tend not to require down payments, that doesn’t mean going that route is a good idea. In fact, saving for a down payment is a far more rewarding financial decision that has lasting benefits for your long-term investment.
You should aim for at least a 20% down payment to lower your overall mortgage rates and avoid private mortgage insurance. It also shows the lender that you are capable of managing your finances and can open the door to long-term cost savings for you.
Saving for a Home
Now the question becomes, how do I save for a reasonable down payment? Rent costs seemingly go up every year, and it feels like saving enough for a home would take years. To that we say, don’t worry — you can do it!
With that said, consider opening an OZK Savings and OZK Checking account to launch that savings plan for your new home. When you open these accounts together, you can set and forget your savings with automatic transfers* from your checking account to your savings account. You also can round up your debit card purchases with the My Change Keeper** tool, and let your hard-earned savings earn interest.
Talk to your banker about how to make the process of saving for a new home as easy and painless as possible. With patience and consistency, you’ll reach your down payment goal.
*Restrictions and limitations apply. Not available to all account types.
**Enrollment is required for My Change Keeper. Terms and conditions apply.