While the thought of paying a mortgage is more enticing than paying rent, it is important to understand all the costs involved, not only in buying a home but also in owning and maintaining one. Let me help you determine whether or not you can afford to join the ranks of homeowners.
Potential home buyers need to factor in the down payment, the cost of homeowners insurance, property taxes, and necessary closing costs. Other expenses buyers need to consider are inspections, packing and moving costs, purchasing major appliances if not included in the property, home furnishings and design accessories to make your new house a “home.” Then there are home maintenance costs to budget for. Gone are the days of calling up the landlord to fix your problems. You’ll be responsible for everything from malfunctioning appliances to leaky faucets, broken heating and air conditioning units, to name a few. And if you buy an older home, you’ll eventually encounter costly repairs such as replacing the roof or windows. It is important to have a budget plan to save for these inevitable maintenance costs.
Let’s break these down a bit to help you…
1. Property Values. Determine the property value of homes that interest you. The property value (what the home is worth in the current market) is determined by comparing the price of similar homes recently sold in the same community or in close proximity to it. This is where my expertise will shine for you. I will be able to do the needed research to advise you on market value so you get the most home for the least amount of money.
2. Mortgages 101. Review different mortgage loan types and their required down payments, generally ranging between 3 and 20 percent of your sale price. With smaller down payments, you will need to factor in private mortgage insurance, a policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to re-pay the loan. Be sure you understand any “points” the lender may be charging you. Points enable you to “buy down” the interest rate and are calculated by a percentage. I can assist you with picking the right lender who will put you with the loan product that’s best for you.
3. Property Taxes and Homeowners Insurance. Many lenders will require an escrow account in which monthly payments for property taxes and homeowners insurance are paid together with the monthly mortgage payment. (Take the amount of the property taxes and homeowners insurance for the home you are purchasing and divide by 12 to figure how much the lender will need to add to your payment to fund the escrow account.) Your loan officer should already have this figured out for you when they give you your monthly payment amount. I will be able to help you calculate this as we look at homes, and I can assist you with a list of companies who offer homeowner’s insurance.
4. Closing Costs. Get an estimate of your closing costs, taxes, recording fees, prepaid loan interest, title insurance policies, attorney fees. These can possibly add up to between 2 and 7 percent of the property value. Your loan officer and I will assist you with these figures so you know in advance whether or not you feel comfortable moving forward with a home purchase.
5. Inspection Costs. When buying a home it is always advisable to have a home inspection to uncover any major defects that should be corrected by the seller before you take ownership, and also to have a good idea of what maintenance items you should budget for down the road. Your home inspector will point these things out to you as he/she tests all the major systems and components of the home. Radon is another test the home inspector will perform if needed. If the property has well water, you will want to have this tested to be sure it passes for safe drinking and home use. These are additional costs to you, the buyer. I will put you in touch with some home inspection companies to choose from and advise you on which inspections you should order.
6. Total Out-of Pocket Costs. Totaling up the down payment, closing costs, and the cost of inspections will give you an idea of your out-of-pocket costs. You will need to have these funds available, and there are some great programs to help first-time home buyers who fall short in this area. Receiving gift funds from a family member can sometimes be a helpful option too! Your lender and I can help you with some options you may or may not know are available to you.
7. Moving Expenses. You will also want to consider the cost of your actual move, whether you will hire a moving company or rent a truck and do it yourself with the help of family and friends. Either way, you will bear some moving expense I’m sure. And of course, the more stuff you have to move, the more it may cost you. I am happy to help you with ideas to make the process as smooth as possible.
8. Home Maintenance Budget. Next, consider a budget for maintenance and repairs. Depending on the age of the home you are buying, you may need to have funds set aside right away for some maintenance or repairs. If the home is fairly new, you will have more time to build up a maintenance “nest egg.” I have a network of service providers I can put you in touch with anytime you need service for anything in your home.
Once you crunch numbers, if you find you come up a bit short, investigate ways to reduce or creatively fund your down payment. There are lots of great programs available, and you may have a family member who would love to help you get into your first home. Just ask!
In your final analysis of whether or not you can afford to become a homeowner, you’ll want to weigh the costs against the financial benefits. You can relax knowing you have a consistent mortgage payment that is building equity for you and not your landlord. There are definite tax benefits with deductions for mortgage interest paid, closing costs in the first year, and property taxes. The all-important difference between owning your home and renting is the appreciation factor, the rate of increase in your home’s value.
Ready to take the plunge and start the exciting journey to home ownership? Contact me TODAY to get started!