You work hard for your money, make sure it stays your money!
Buying a home is not as simple as you think. There are several options and variables that must be considered when buying a home. We will discuss them as we make our way through important decisions you will need to overcome.
Check the Current Climate
As we enter late fall 2022, the economic sentiment is not positive. We face inflation, rising interest rates, a down stock market and a real estate market that may be overheated. Will real estate continue to rise or will it crash? No one knows the answer for sure, but we will likely see some reduction but not a crash.
Should I buy it? Interest rates have begun to rise, will housing prices decline? Always buy when you are ready, not before. Interest rates and housing prices should not be a driving factor. It is always a goal to get a good price when you purchase. Recently, when a house went up for sale, there were several potential purchases, this is not the case now. It’s a slowing of the market.
When are You Ready to Buy a Home?
You are ready when you have a solid foundation: a solid budget month after month, completely out of debt – no credit card debt, car loans or leases, student loans and personal loans – a good emergency fund of at least three months of expenses, six is better, and a down payment of 20% to avoid PMI (private mortgage insurance). That’s when it’s time to go shopping. Do not overpay for a home.
Find a Real Estate Agent
A good real estate agent is imperative. They know the market and the potential to guide you through the process. They deal with the buying and selling of real estate. Find yourself a good one. If you are a buyer, they will save you money. If you are a seller, they will make you some money.
Shop for a Mortgage
When it’s time to shop for a mortgage, don’t go with the first one. Get at least three quotes. The objective is a 15-year, fixed-rate conventional mortgage costing no more than 25% of your take-home pay. This is to include any principal, interest, taxes, insurance and HOA fees.
Getting pre-qualified will help in your ability to negotiate with a seller.
It may be tempting to go with an adjustable rate mortgage, but I would tell you to stand clear unless you understand them, they can be complex. Understand the risk.
Eliminate Other Debt
All other debts must be eliminated. One, it will free up your cash flow. Two, mortgage lenders will review this other debt and determine what you can borrow on a mortgage.
The lenders look at all debt and determine how much overall you can borrow. That may be about 50% of your take-home pay, ouch! They will then deduct all non-mortgage debt and that will be the amount they will be willing to lend for a mortgage, which could be less than the 25%.
It is to your benefit to eliminate as much, if not all, of your non-mortgage debt and certainly do not take on any new debt.
Adding in Repairs, Maintenance
When you decide to purchase, one factor to take into consideration is what kind of repairs you will need to do when you move in. Are there things that may need immediate attention, such as a new roof or an HVAC system? If so, then you will need to budget some funds. Or are you potentially looking at upgrades, perhaps a new kitchen or bathroom?
What is Your Credit Score?
If you borrow money, you have a credit score. Your credit score is important in that it could help or hurt your ability to borrow for a mortgage. The higher your credit score, the more likely you are to get a more favorable rate. If your credit score is low, you may want to seek alternative methods.
Consider Taxes
Be aware that with a home comes property taxes. Tax rates vary but the better the school district, the higher the taxes you can expect to pay. Remember, as you buy, one question to get an answer to is how is the school district? A good school district has a direct impact on the value of your home.
The deduction for real estate taxes along with mortgage interest has all but gone away, so there are no factors for these to take into consideration.
Retirement Planning
Buying a home is part of your retirement plan? How can that be? If you follow the formula and take out a 15-year, fixed-rate mortgage, then the house should be paid for well before retirement.
As you enter retirement, having a paid-for house will reduce your living expenses dramatically. The only living expenses for housing would be property tax, insurance and any repairs and maintenance.
Risk Management
Of course, this is the part where we discuss homeowners insurance. This is required! Your mortgage lender will require it. On the other hand, this also protects you against any potential disaster. Make sure your coverages are adequate to cover rebuilding and you are insured for replacement value. Insure your content as well.
Estate Planning
The final piece is to make sure you make provisions for your loved ones. Make certain you have a will. Let everyone know who gets what. Who gets your house? If you have minor kids, you need to provide for them.
Conclusion
In the discussion above, a number of options and information were presented to help you make a more informed decision when you purchase your home. Include these in your plan and you will be successful. Learn as much as you can about each one of the items discussed. It will be to your advantage.
Good luck!
You work hard for your money, make sure it stays your money!
Thanks for reading. I hope you found this helpful. QCBN
By Steven Calabrese
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner-operator of a website known as thepersonalfinancewizard.com. Such topics as budgeting, investing, paying off debt, and goal setting are discussed.
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