What You Need to Know Before Buying Your First Home
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Buying a house is a major milestone. Although it can be a very good financial move, there are also a lot of things that can go wrong. It’s not a move that you want to make quickly or without a sufficient amount of thought and research. With that in mind, let’s take a look at some specific things that are important to know and understand before buying your first home.
Owning a Home Requires a Lifestyle Change
While buying a home is a financial decision, there are many other factors aside from finances that should also be considered. Becoming a homeowner will add a number of responsibilities that you don’t have as a renter, and you don’t want to overlook these things. As a homeowner, you’ll be solely responsible for taking care of the home, and this can be a big responsibility. When you’re renting, you can call the landlord or a property manager if something needs to be fixed. Those days are over if you own the house. Aside from maintaining the house itself, you’ll also need to maintain the property. Depending on the property, this can easily require more time and effort than maintaining the house. One of the major advantages of renting is flexibility. As a renter, you can move easily without excessive costs. You could move across town to another apartment or move across the country. Owning a home gives you far less flexibility because you’ll probably need to be able to sell the house in order to move, and selling comes with a lot of expenses. Before buying a home, consider your current lifestyle, as well as the lifestyle that you want to have over the next few years. Are you ok with sacrificing some flexibility? Will you mind putting in the time needed to maintain the house?
Buying a Home is Not Always the Right Choice
Many of us grew up hearing that renting is essentially throwing money away. Buying a home just seems like the thing you’re supposed to do when you become an adult. But in reality, there are plenty of situations where it makes more sense to rent. If you’re unable or unwilling to maintain the home, if your credit is limited or damaged, if you have significant debt that needs to be paid, or if you don’t have money saved for a down payment, renting would probably be the better choice. Don’t feel like you need to buy a home just because that’s what other people expect you to do. If renting is the better fit for you, there is nothing wrong with renting until your situation changes.
Don’t Let the Bank Tell You What You Can Afford
When you get a pre-approval for a mortgage, the bank will tell you how much you’re qualified to borrow. Don’t confuse this with how much you can actually afford. Just because the bank approves you for a certain dollar amount does not mean that you should spend that much. Unfortunately, a lot of people, especially first-time buyers, use the bank’s pre-approval amount to determine how much they’re going to spend on a house. Be sure to take the time to create your own budget so you know what you can comfortably afford. If you wind up spending too much on a house, you’ll become house poor, which means you won’t have enough left over to pay other bills or for discretionary spending. Part of the reason why some people overspend on a house is that they see the house as an asset and they’re ok stretching to purchase an asset that should appreciate. Although the equity in your home is an asset, not all assets are the same. Pay attention to your liquid net worth, which is calculated by subtracting your liabilities from your liquid assets (assets that can be quickly converted to cash). In an emergency situation, cash and other liquid assets will be more useful to you than your home. Be sure that you’re not putting too much money into your house at the expense of your liquid assets.
Plan to Be in the House a Minimum of Five Years
Most experts recommend that you’ll need to be in a house for about five years in order for appreciation to cover the costs of buying and selling. Of course, this is a generalization and the details of what will happen with real estate in the next five years is just a guess, but it should at least give you a starting point for your decision. Because there are so many costs involved with buying and selling a house, you’re usually going to be better off renting if you think you would be likely to sell the house in less than five years.
Don’t Forget to Look at the Total Cost
When you’re looking at a house and trying to determine if you can afford it, be sure that you’re considering all of the costs. Your housing costs will involve much more than just your monthly mortgage payment. You’ll also need to factor in things like:
Private mortgage insurance (PMI)
Those other costs really add up, so you don’t want to overlook them. You’ll need to estimate the maintenance costs, but a good rule of thumb is to plan to spend 1% of the value of the home each year for maintenance and upkeep. So if the home is worth $200,000, you could plan to spend about $2,000 per year in maintenance. Be sure to consider your budget percentages. Most experts recommend that you spend no more than 25-28% of your income on housing (which includes all of the costs mentioned in this section).
Be sure that you’re working with a qualified, experienced realtor who is going to do the best job for you. There are a lot of realtors out there, but you won’t get the same level of service and expertise from all of them. Chances are, you have a friend or family member or someone in your personal network that’s a licensed real estate agent. If that person happens to be highly-qualified, that’s great. But many people simply hire someone they know rather than trying to find the best option. A good realtor will look out for your own best interest rather than theirs and can save you money and headaches in so many different ways. Before choosing a buyer’s agent, be sure to get referrals from people you know and trust. Interview any agents that you are considering and research them online to read reviews and ratings.
Consider Long-Term Rental Potential
What type of home will you be purchasing? Many starter homes will also make excellent rental properties, especially townhouses and condos. You may or may not have an interest in owning a rental property, but this is something that you should think about. One of the most practical ways to get into real estate investing is to keep your home when you’re ready to move out, and rent it instead of selling it. If this is something that interests you, be sure to think about rental potential when you’re looking at different properties. If you live in the house for a few years and then rent it out, you’ll be gaining an income-producing asset that can be a big part of your long-term financial plan.
Don’t Stress About Cosmetics
When you’re looking at different houses and trying to decide which one to buy, be sure that you’re focusing on the right details. Cosmetics are easy to change. You can paint the walls, put in new flooring, or change the countertops very easily. But other things like the location cannot be changed. Things like the location, neighborhood, size, and layout should all be considered as a priority over the cosmetics that can be changed fairly easily. Of course, you’ll need to think about the cost of changing those cosmetics. If you’re planning to re-do everything in the house, the cost is going to add up. But there’s no reason why you need to do everything right away. If you’re considering purchasing your first home, be sure that you don’t rush into the decision and take the time to evaluate and decide what is best for you or your family.
Credit Shout is a community of personal finance experts dedicated to helping you save money and make smart financial decisions. Learn how to master your credit card rewards, improve your credit score and start eliminating your debt.