There are a range of emotions that come with the homebuying process, and excitement is definitely one of them! And while it’s great to be optimistic that the perfect house is out there, it’s just as important that you’re ready to make smart compromises. Even if you think you know exactly what you want in a home, keeping an open mind can lead to significant savings.
Here are three tradeoffs house hunters often face, and what each could mean for your budget:
1. New vs. existing
One of the main financial benefits of a newly built house is that it can be more energy-efficient than an existing one, making your utilities less expensive, says Keith Hill, a loan officer at SunTrust Mortgage.
Another appealing reason to build a brand-new home is the opportunity for personalization. You can often choose floor patterns, wall colors, fixtures, etc. But starting from the foundation can bring a lot of unknowns, which could have a significant impact on your budget. Expenses for materials may increase, for example, or you might want to make a design change during the process. “If there’s a change that’s needed, change orders can be a significant additional cost to the home,” says Andrew Barbar, president of the Florida Association of Realtors.
On the other hand, when purchasing an existing home, you’ll have a better idea of know upfront what the costs will may be. If you’re working with a tight budget, the security of this fixed expense can be key, Barbar says.
2. Fixed- vs. adjustable-rate mortgage
When determining whether a fixed- or adjustable-rate mortgage1 makes more sense for you, the most important thing to consider is that you should never borrow more than you can manage.
If you take out a fixed-rate mortgage your interest rate will stay consistent throughout the life of the loan. Knowing exactly how much you’ll be paying each year can provide security and the ability to plan your budget ahead of time. If you are confident that you will be staying in the same location for more than five years, this is a common choice.
An adjustable-rate mortgage, or ARM, has a fixed rate for a set period of time and then adjusts with the market. The initial-term payment will likely be lower than one for a fixed-rate mortgage.
“An ARM is good for a buyer who doesn’t plan on staying in their home longer than the fixed-rate period, or maybe if they think their income will increase before the interest rate adjusts,” Hill says.
The downside is that, because your interest rate will fluctuate with the market, it can be difficult to predict how much your mortgage will cost you in the future.
3. Location vs. everything else
Homebuyers are often told to prioritize location, but at what cost? Let’s say you’ve found a house in your dream neighborhood, but it’s pricey, and you could get a better deal by moving to a nearby neighborhood you’re less crazy about. Are the potential savings worth it?
That depends on your priorities.
“Look at what your priorities are, and make sure that whether you’re in the more affordable neighborhood or your dream neighborhood that it meets your criteria and it meets your standards,” Barbar says.
For example, the school district your new home is in could affect its resale value. But does that matter more to you than the size of the house? Assess your needs versus your wants, and if you truly do need four bedrooms, for instance, you may prioritize the size of the house over the school district.
Rethinking your home buying wish list doesn’t have to be a bad thing. By being flexible and looking at both sides of a decision, you’ll be better positioned to find a home you love at a price that's right for you.