Money Management

Owning a home is a dream for many people. Keep reading to learn a few crucial financial moves you should make before taking that leap. 

Buying a home sounds like fun. You tour beautiful houses, dream about the garden you can plant in that spacious yard, and imagine how great your couch will look in the living room. However, before you get to that point, it’s a good idea to really dig into the financial side of home-buying. Here are three less romantic (but extremely important) money tasks to reckon with before hiring a real estate agent, getting a mortgage pre-approval, or picking out paint colors.

1. Really consider the costs involved

I have definitely discussed housing costs with homeowner friends, and learned that I pay more per month in rent than they do on a mortgage. But despite this, I know I’m coming out ahead overall, because owning a home is expensive. In fact, research from The Ascent found that in 2019, homeowners paid an average of about $717 more per month than renters. If this extra wasn’t being spent on mortgage payments, it likely went to homeowners insurance (which is more costly than renters insurance), property taxes, or higher utility bills than those faced by renters.

Plus, as a homeowner, if something goes wrong (like a roof leak, a broken window, or any one of 1,000 other potential mishaps), it’s on you to pay for repairs. The same goes for routine maintenance, like cleaning out your gutters or having your heating system serviced. And even if what goes wrong is a covered peril on your homeowners insurance, you get to file the claim and pay your deductible.

All of this is to say that if you think you’ll get to spend less by buying a home, you are likely wrong. In terms of keeping things affordable, it’s recommended that your housing costs (including your mortgage payment, homeowners insurance, property taxes, and so on) don’t amount to more than 30% of your take-home pay. So if you’re dreaming of buying, it pays to consider the costs and your income before getting too far down the planning road.

2. Save, save, and save some more

It isn’t enough to just reckon with how much buying and owning a home could cost you. You also need to actually save money for the purchase itself. Your costs here will include the down payment, closing costs, a home inspection, and perhaps other expenses involved in the process.

The down payment is likely your biggest hurdle, as it’ll be the largest amount of money involved. You don’t actually have to make a 20% down payment to buy a home. You may qualify for a conventional mortgage loan with just 3% down. If you’re a first-time home buyer, you may be able to get an FHA mortgage loan with 3.5% down. The USDA and VA offer mortgage loans for 0% down. Here’s the thing about small down payments, though: They can be expensive in other ways.

If you have a down payment under 20%, you’ll be required to pay for mortgage insurance, which adds to your monthly payments (and in the case of an FHA mortgage, is also an extra fee to pay at closing). Worst of all, you could find yourself underwater on your loan. If you need to sell your home and owe more than it’s worth, you could sell and still owe money on the loan. Not good.

It might seem impossible to save up enough to make a solid down payment for a home, but before you give up on the idea of homeownership, look into average costs for the type of home you’d want to buy (and in the areas you’re interested in). Remember, that 20% figure is only a recommendation, not a requirement. Perhaps you can put 5%-10% down, and buy a less-expensive starter home, freeing up some cash to cover that mortgage insurance. You might also consider picking up a side hustle and saving what you earn for home-buying purposes — extra money coming in that isn’t already dedicated to your bills can be a major boon to your finances.

3. Get your credit in the best shape possible

Besides saving money, the biggest favor you can do for yourself in the course of planning to buy a home is to whip your credit score into shape. The better your score, the more likely you are to have your pick of mortgage lenders and to be offered the best interest rates. Remember, a home is likely to be the largest purchase you’ll ever make, and the lower the rate you score, the less your costs will be over the full loan term (which could be as long as 30 years). Let’s take a look at two examples to see what a difference a higher credit score can make for a home purchase.

Let’s say you’re hoping to buy a home for $300,000, and you’re putting 10% down ($30,000). So you’ll be borrowing $270,000 for your 30-year fixed conventional mortgage loan. If your FICO® Score is 620 (generally regarded as the minimum for a conventional loan), you’ll be looking at an interest rate of 7.65%, and a monthly mortgage payment of $1,916. You’ll pay $419,648 in interest over the life of the loan. If your FICO® Score is 750, however, your interest rate will be 6.283%. Your monthly payment will be $1,668, and you’ll pay $330,565 in interest over those 30 years. This is a savings of nearly $90,000.

While it may seem daunting to improve your credit, there are a few steps you can take that can make a world of difference.

Pick through your credit report: You can get your credit report for free on a weekly basis for the rest of 2023. Go through it with a fine-toothed comb and look for errors or accounts that were paid off and should be off your report by now. Credit report errors are quite common, and having them removed by the credit bureaus can boost your score.Pay off some debt: If you’re carrying high-interest debt, such as that on credit cards, paying that off is another huge favor to do for yourself before trying to buy a home. You’ll lower your debt-to-income ratio and free up additional money for housing expenses.Get on top of your payments: If you have a history of making late payments on your debts, now is the time to get better about paying on time. Payment history makes up 35% of your FICO® Score — the biggest piece. Speaking from experience, even if you’re carrying a lot of debt, having a stellar payment history can keep your credit score from tanking.

While none of these tasks sound particularly exciting, they are extremely important if you want to succeed in your quest to buy a home. Why not take the time to consider the costs of homeownership, save money for them, and really drill down on improving your credit? Your future homeowner self will thank you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Taxes are due on April 18 this year. Read on to see what happens if you’re 24 hours late with your return. 

Normally, taxes are due on April 15. But this year, filers get an extra three days to get their returns to the IRS.

That’s because April 15 falls on a Saturday. And whenever that happens, the filing deadline is automatically bumped to the next business day. But since Monday, April 17 is Emancipation Day, a Washington, D.C. holiday, filers all over the country get another day to get their returns to the IRS and still be considered timely.

Ideally, at this point, your taxes have already been submitted and you’re simply sitting back and waiting for your refund to hit your checking account. But what if you’re still in the process of getting your taxes done, and you’re not sure you’ll finish by April 18?

You may be thinking that one extra day will help you finish the job. But submitting your tax return even one day late could have negative consequences.

Do you owe money, or are you owed money?

Whether you’ll be penalized financially for being late with your tax return — even if you’re only a day late — will hinge on if you’re due a refund or you underpaid your 2022 taxes and owe the IRS money. If you’re eligible for a refund, being a day late won’t matter.

In fact, technically, you won’t face penalties even if you’re 100 days late. You’ll be hurting yourself by virtue of delaying your tax refund, but the IRS won’t penalize you beyond that, since it’ll get to hang onto your money even longer.

It’s when you owe the IRS money that you need to be really careful about filing your taxes on time. That’s because being 24 hours late could cost you.

When you’re late with a tax return and you owe money, the IRS will impose a failure to file penalty on you. That penalty will amount to 5% of your unpaid tax bill for each month or partial month your return is late.

So in this regard, it doesn’t matter if you’re one day late or 29 days late with your tax return — you’ll still risk being penalized 5% of your unpaid tax bill if you submit your return late. And, of course, if you’re more than a month late, additional penalties will apply.

You should also know that if you’re late paying your actual tax bill, interest and penalties will accrue there, too. Granted, the interest you rack up by paying one day late may be minimal, but you’ll still face a penalty.

What to do if you need more time for your tax refund

Clearly, being just one day late with your taxes could have serious consequences. So if you’re worried you won’t get your tax return done by April 18, request an automatic six-month extension.

An extension won’t give you more time to pay your tax bill, so if you don’t pay in full by April 18, interest and penalties will start to accrue. But that way, you can at least avoid the failure to file penalty, which can be far more costly. And if you get an extension, it might allow you to finish your tax return in a calm, collected manner, thereby reducing the chances of you making a mistake.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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