Paying a hefty rent check every month can easily make you start thinking about buying your own home. After all, since real estate is almost always a solid long-term investment, why *not* spend that “rent money” on yourself instead?
That said, as much as it seems like a great idea on paper, owning a home is not for everyone at every life stage. There are several things you should consider before you begin your home buying search.
Consideration #1 – Your Future Plans
Are you going to be in the area for a while? Because buying a home is not for those in a transient period of their life. Depending on the market and your mortgage contract, it could take five to seven years to realize any significant equity on a home*. So you’re pretty much stuck for that time, and even somewhat beyond, because if you decide to sell and move on, it could take time – perhaps even a year or more – to get your asking price
So think about where you are in your life, and what your family plans are. Also, think about how your lifestyle may change in the next few years. Do you plan on getting married, having kids, changing jobs, or even losing a spouse’s income? These are all important questions to ask when considering buying a new home.
In addition, it’s also important to consider your life plans when choosing the size of your home. Will the house you have your eyes on be a realistic fit for your family in several years? And no, do not count on upgrading quickly – as already stated, it’s not unusual to see houses sit on the market for a year or more.
Consideration #2 – Added Costs and Time Investment
To begin, there are several additional costs on top of a mortgage to consider before setting your budget for a home. You have closing costs**, and insurance costs, and, depending on where you live, these will add several thousand dollars to the budget.
But the biggest “added cost” will be maintenance, both in a monetary and time sense. Houses require upkeep, and the older the house you buy, the more upkeep it will require. Plus, when something goes wrong in a house, you usually do not have the option of putting the repair off. Roofs need to be fixed quickly. Plumbing cannot leak. The furnace has to work. Electrical problems cannot be ignored. And so on. Whether you tackle these issues yourself or hire someone, the expense adds up.
In addition, simple upkeep on many homes might be more than some people want. Lawns need to be mowed, and, depending on where you live, snow must be removed. It can be a lot of work, and there have been plenty of new homeowners that discovered they’d rather have the “lock the door and go” carefree feeling an apartment gave them.
Consideration #3 – Preparing Your Finances
Make sure your credit score is in good standing before you start searching for your dream home. However, only use credit checks that do not affect your credit score – some banks provide this service for free, and you are entitled to a free credit report annually.***
If your credit score isn’t an issue, the next step is saving for a down payment. To avoid having to purchase private mortgage insurance or the lender’s mortgage insurance, you will need to have a down payment that is equal to 20 percent the cost of the home you have your eye on. For a $250,000 dollar home that’s $50,000 dollars (far from pocket change).
It’s important to calculate your mortgage budget as well. You can use 28 percent of your net income as your rule of thumb for determining your monthly mortgage budget. In other words, you can devote a maximum of 28 percent of your monthly income to your mortgage payment. You might want to consider even a lower percentage if you have hefty student debt fees or other costly payments.
If you need help, IMAFS can help you plan your finances for a future home purchase, and also help you find ways to save money and refer you to reputable real estate agents. Call today for a no cost financial consultation at 208-504-1736 or visit www.imafs.org.