New home buyers face a challenge that older home owners typically don’t. The advantage of age and equity has given those older buyers a cash advantage that younger buyers don’t always have. Of course, there are exceptions to the rule, but it’s safe to assume most millennial buyers are relying on only a small amount of help from family and funding their purchases largely from their own savings. Under these conditions, a savings plan is absolutely essential, or your dream home might become a money pit that sinks you.
One way to avoid being cash poor as you take on a larger mortgage payment is to reduce the amount the government will withhold from you each year. Owning a home means you’ll get some major tax breaks at the end of each year, so you can afford to reduce withholdings because your taxes will be offset by those breaks.
It’s a good idea to talk with your tax preparer about this after your first year of ownership. This will give you plenty of time to assess your financial situation, and give you a fresh start before the year gets into full swing.
Avoid Using Equity Unless You Need It
Equity is great, and it means you made a good investment. Congratulations! Now, let that equity build. If you use your equity line of credit for unnecessary purchases (such as a new car, or adding a hot tub to the backyard), you’ll fail to see any reward for your efforts. Always consider your equity line as a means for reinvestment, and only spend it on projects that promise some kind of payback for the work you do.
Dealing with Payments
House payments are the thorn in just about everyone’s side, so make sure yours won’t kill you before you even move in. Your broker should have accurate estimates of the costs you face for the mortgage and your taxes. They may not have an accurate estimate of insurance, so you’ll need to look into that yourself. There are some calculators online that provide a fairly accurate estimate as to what you’ll pay, so be sure to triple check your numbers before you sign any documents.
The final tip is to budget about 10-15% higher than what you think you need. Another good idea is to go based on what your highest bill was for the year in each category. For example: take your highest electric bill and let that be the standard you use for saving all year long. You’ll end up with more money than you need during months where you rely less on the air conditioner, and you’ll be able to use your home the way you want.
Kuba Jewgieniew is the CEO of Realty ONE Group, which is one of the top 5 real estate brokerages in the nation according to REAL Trends Magazine.