The major expenditure for most individuals and couples relates to housing - hence it is the first budget cagtegory that we are going to explore in further detail.
As you are no doubt aware, your housing expense consists of much more than just your rent or mortgage payment. It also includes those wonderful things like utilities, property taxes (for owners), and maintenance. Note that property and renters insurance is in a separate category so it will not be discussed today.
This entry is going to focus on homeowners, but even if you are a renter, you should still pay attention because there is a good possibility that you are going to be a homeowner some day.
The basics of this category are quite easy: your actual mortgage payment. Depending on how your mortgage is set-up, you may also be paying your property taxes and possibly even your homeowners insurance with your mortgage payment each month. The major thing to consider with your mortgage are: affordability, interest rate and amortization. Be careful - because all three work together hand-in-hand to determine just how much you will be paying each month.
For example, are you seeking a smaller payment yet your interest rate is on the high side? The a longer amortization period (i.e. the number of years that you have to pay off the loan) will reduce your payment - however, be aware that a longer amortization also means that you will be making extra years worth of payments and this will cost you far more in interest than any savings that you achieve on your payments.
If paying too much over the course of your mortgage is a concern - and it should be - then you may want to consider utilizing a shorter amortization schedule. If your interest rate is low enough to make the payment affordable, you can save thousands over the life of your loan. To give you an example of this, I am currently in process of refinancing my mortgage. My current rate is 6% and I have approximately 23 years left on my mortgage. By financing into a 4.5% 15 year loan, my payment will increase a little, but I will be saving over $100,000 when comparing the new loan to the old one. That is real money!
The moral of the story: seek out the lowest possible interest rate with the shortest manageable amortization possible to come up with a payment that you can afford.
One last thing regarding your housing budget: be aware of those pesky maintenance costs. At some point in time, pretty much your entire home will be replaced through normal wear-and-tear or just a process of regular updating (think carpets and new roofing). In order to manage these expense, it is important that you save some money each month into a high rate savings account so that when the expenses hit that youw ill have a ready source of cash to be able to pay for them. The same principal should apply if you do not pay your property taxes as part of your mortgage payment, except that you should take your annual tax bill, divide it by 12, and save that amount each month.
Now that you have a little more insight into budgeting for your housing expense, I hope that you can sit back and enjoy the peace and freedom that home ownership brings!
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