Buying a house will more than likely be your greatest-dollar purchase you ever make! From looking at houses to moving into your new home and everything in between, the process can feel like too much. Here is some advice to help first-time home buyers in this crazy market.
Set Your Budget
I actually have a precursor step before you even begin to set a budget: get out of debt! If you have credit card debt, personal loans, student loans, medical debt, or any other kind of debt already looming over your head, you are not yet ready to jump into home ownership. Owning a home is a big responsibility that sometimes comes with surprise costs. Before you take on caring for a home and all that comes with it, pay off your debt.
What Is a Fair Budget?
Then, figure out how much you’re willing to spend on a house. There are a lot of factors that should go into this number. Don’t go off how much house a mortgage company tells you that you can afford! Often times, they will tell you you’re qualified for way more house than you have any business buying.
The first thing when buying a house is to decide how long you’re willing to be in debt. While we don’t believe in anything more than a 15 year mortgage because of the difference in interest paid, please do your homework. If you too decide to go for a 15 year mortgage, you won’t qualify for quite as much house. But you will pay off your house in half the time and build equity much faster. Also, no more than 30% of your take home income should go toward housing. This includes mortgage payments, property taxes, home insurance, and HOA fees.
For instance, if you are looking to buy a $300,000 house, the payment for a 15-year mortgage at today’s current rate (5.5%) is roughly $1,961.* However, the payment on a 30-year mortgage at today’s rate (6.5%) is $1,517.* Even though the payments are $444 different each month, the total interest savings (aka money you are giving straight to the bank and not equity building) is $193,127! This means if you have a 30 year mortgage, you are paying almost 3 times the amount of interest and taking 15 extra years to pay off your mortgage, all for a savings of only $444/month.
DOWN Payment
Another hard stance my husband and I had was putting 20% down on a home. While this isn’t feasible for all families in all areas of the country, you will have to pay an extra fee called Private Mortgage Insurance (PMI) each month if you don’t put at least a 20% down. For my husband and I, this meant spending almost 2 years pinching pennies and saving as much as possible each month so we could put 20% down on our first home. If your situation is different and this isn’t feasible, save as much as you can and put down a significant down payment. This will again help you build equity faster as a higher percentage of your payment each month will be going to principal and less to interest and PMI.
Other Costs
Next, consider your other costs when considering how much you want to spend on housing each month. Some costs to consider are maintenance costs for your home. A good general rule of thumb is to assume either $1/sq ft of a home or 1% of your home’s value per year, whichever is higher. So for a $300,000 home, the minimum maintenance costs you’ll want to save are about $3,000. Other maintenance costs include big home projects or something like a roof needing to be replaced.
Next, consider life costs. If you have kids and you plan to help them with their college costs, think about if you’ll be able to adequately save for this while paying off your home. Make sure you’re saving for retirement for yourself as well. If you have young kids now, plan for them to continue to get more expensive! Right now our kids do very minimal activities, but as our kids get older, activities and life expenses for kids will continue to increase. Also, consider any major increases or decreases in income you may experience. When my husband and I purchased our current home, we were a dual income, no kids household. Now we are a one-income, 4 kids household! Thankfully, we planned for this as we thought about how much house to purchase.
Finding a Home
Before buying a house, decide the features that are needs and wants in a home. You may not be able to get everything on your wants list, but the needs list should take top priority. Work with a realtor who is familiar with your area and has access to the entire database of homes available, but don’t be afraid to be firm on your budget.
As you begin looking, keep in mind that some things can be changed in a home. If you hate all of the light fixtures or paint colors, don’t make it a deal! You can change them once you move in! However, if the location isn’t ideal, this can’t be changed. Also, keep in mind the cost of changes you’re interested in making as part of your overall budget. If you want to purchase a $300,000 home, but it needs $20,000 worth of work, then your budget just increased. However, if you find more of a fixer-upper for a lower budget, that might be more doable. While the cost of homes has increased significantly in recent years, so has the cost of contractors.
The cheapest time to buy a home is typically off-season, or October to February. There are also typically less houses on the market at this time and it might be harder to find exactly what you’re looking for. We happened to be looking during off-season when we bought our home and were able to get a wonderful home at a great deal after negotiating a lower price.
Final Details
Once you’ve found a great home in your price point and you’re ready to seal the deal, there are still a few more key things to remember. First, ALWAYS do a home inspection. Even though everything might look great to you, if there are issues in the home, you want to know about them before you move forward. This is painful to say, but if any major issues show up in the home inspection, maybe it’s time to walk away!
Don’t forget to think about additional costs like movers, new (or used) furniture if you’ll have more rooms than you have now, landscaping, closing costs, and any maintenance/renovation/repair costs you need to budget for.
Lastly, enjoy! Buying a house is a joy and a frustration sometimes. There will be unexpected maintenance from time to time. Your sump pump may break. Your kitchen may flood. Or you may just have a bird that gets into your bathroom exhaust fan (all of these are real life examples, unfortunately). But having a home that you can grow some roots in, make memories in, and raise your family in is a blessing like no other. Happy home buying!
*The payments listed above assume a loan amount of $240,000 due to a 20% down payment.
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