Owning a home is part of the American dream. It's also a great way to build long-term wealth, establish security and comfort for your family, and potentially reduce your living expenses both today and later in life.
But before you take the plunge, there are some important things that every prospective homeowner needs to know. Not only can these things help you go into the home-buying experience with a better idea of what to expect, but they can also save you money today and better prepare you for the experience and costs once you actually become a homeowner.
Know your market
Real estate is a very local, and it's important to understand what you'll be dealing with where you buy. The market in your town could be full of inventory and a "buyer's" market, while a 100 miles away every home is selling above list price within days of listing. In other words, don't try to buy a house just based on what you're reading in the national news.
This may necessitate working with a real estate professional, such as a Realtor. Not only should a Realtor understand local market conditions, but they should also know, based on your criteria, which neighborhoods make the most sense for you and help you more quickly narrow down the options to listings that make sense for you. And considering that the vast majority of existing homes sold in the U.S. are listed with a Realtor, finding your own agent to represent you won't cost you any more money and should help you make a competitive offer when you do find the house you want.
Know how much cash you'll need up front
Even if you plan to finance the majority of your home, there are a number of out-of-pocket expenses that a homebuyer would be responsible for, including (but not limited to) the following:
- Property inspection
- Flood certification
- Property taxes
- Homeowners insurance
- Attorney's fees
- Down payment
According to the National Association of Realtors, the median selling price for single family homes in November (most recent data) was over $220,000. If you are making a 5% down payment (common with FHA mortgages), that's $11,000 you'll need just for the downpayment.
Depending on where you live, the property you are buying, and other factors, all of the other up-front closing costs can be an additional 1% or more of the selling price of the home. So based on the median, that's another $2,200 in up-front, out-of-pocket expenses that you'll need to be prepared for.
Shop for the best mortgage
It's a good idea to shop around for the best interest rate you can get and think about the long term. A fixed-rate mortgage is probably best, with interest rates set to rise in coming years. If a fixed-rate mortgage payment pushes the limits of what you can afford, an adjustable rate mortgage -- or ARM -- that's cheaper today could turn into a real problem in a few years.
Avoid other large purchases or credit decisions
Recently, a friend of mine purchased a home and made a big mistake right before closing that cost him more than $20,000 out of pocket. The lease on his car was set to expire, so he turned in that lease and leased a replacement car. Even though his monthly payment was lower, the added obligation in dollars and years on the new lease led to the bank reducing the amount they would lend.
In order to close on the home, he had to come up with another $20,000 to pay down.
If you're moving forward on a property, don't apply for a new credit card, small business loan, or refinance your car. Even if you're lowering your expenses, changing your debt profile could affect your mortgage approval. Put it off until after closing.
Understand all the costs of homeownership
Owning a home comes with a list of additional potential costs:
- Property insurance, and potentially:
- Earthquake insurance
- Flood insurance
- Property taxes
- Homeowners association fees
- Outside maintenance expenses, including:
- Pool service
- Landscaping/lawn maintenance
- Regular upkeep such as painting, roofing, etc.
- Inside maintenance expenses, including:
- Kitchen and bath
- Tools and equipment to perform the necessary upkeep
There's also a time cost, too, especially if you intend to take on maintenance and upkeep yourself. Those three-day weekends you used to spend out of town may turn into "project" weekends, and more of your disposable income could end up going toward those projects than you expect.
Most importantly, homeowners should also have a larger cash cushion on hand. This is because many of the expenses above, such as property taxes, can be large once-per-year multi-thousand dollar costs. Don't get caught off guard.
Make it a dream and avoid the nightmare
Owning a home can be a wonderful experience, especially if you go into it with the right mind-set and prepared for all of the costs -- both financial and otherwise. If you're not as prepared to buy a house as you thought you were, take a step back and don't rush into a major financial move you may regret, even if you think you've found the house meant just for you.
As a good friend in the real estate business once told me, "The deal of a lifetime only comes along once a week." Buy when the time -- and your financial situation -- is right.
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