Buying a Home
Without knowing anything about someone’s unique financial situation, no one can tell you whether right now is the ideal time to buy your first piece of real estate. But there are a few key factors in determining how to make this size a of a financial decision, particularly how to help you not get trapped in a house you can’t truly afford.
Start with your budget. Many people are willing to make month-to-month sacrifices in order to purchase their first home, but they don’t necessarily consider all the built in costs. The four primary monthly costs to a home purchase are (1) the mortgage payment, (2) home owner’s association dues, where applicable, (3) escrowed property taxes and (4) homeowner’s insurance. But these are not the only costs. You will likely need to apportion additional monthly dollars for costs you didn’t have as a renter: home upgrades, appliance needs, home repairs and general care and maintenance. It’s important that you make sure to estimate these costs and what you can afford first, so you don’t find yourself falling in love with neighborhoods/homes that are well outside your price range.
The second main financial hurdle is the down payment. For some mortgages, you may need to make a 20% down payment, though there are programs out there where you can pay as little as 10%. Be aware that in many situations where you are paying less than 20% down payment you will also be paying a monthly fee called “mortgage insurance” that will add to your monthly cost of home ownership. You can easily spend another 6% on closing costs, and other expenses that come with moving and buying a home. The combination of the amount you need for down payment, moving and closing costs and the monthly cost you can afford should give you a sense for the cost of home that is in your budget.
Your next step is the loan approval process. You may find that in many cases a mortgage loan professional may allow you to qualify for a loan that is much larger than your aforementioned budget allows. Don’t let that mislead you! You don’t want your goal of home ownership to derail your other important goals like saving for retirement, having an emergency fund or saving for a child’s education.
Beyond the down payment, you should have 6-9 months of payments in reserves. Life happens and closing on real estate, and moving are expensive. We rarely see someone move into a new property and not have to update, change, or fix something no matter how nice the property is. Remember, when you own a property you are responsible for the fixes. You also may get a sticker shock if moving from a rental to a house, which may have an inflated electric bill, as well as new bills for water and waste services for example.
Lastly, start shopping! One of the biggest mistakes we see first-time buyers make is falling for properties that will negatively impact their finances for years to come. A home purchase is key, but it is only a portion of your overall financial health and must be considered in context.
Questions to Consider:
- How much can you afford each month to put toward the big 4: mortgage payment, HOA dues, property taxes and homeowner’s insurance?
- How much of a house will that payment buy for you?
- How much of a down payment do you have in the bank? Will you have money left over for closing costs, moving costs and home improvements?
- Will your new mortgage negatively affect your ability to save in your 401(k), IRA or other savings plan?
- Are you in a healthy position with your school loans and other debt before you take on more?
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Trilogy Capital, Inc., a Registered Investment Adviser. Trilogy Financial Services, Trilogy Capital, Inc. and NPC are separate and unrelated companies.