As a Real Estate Agent, I am often asked “What do I need to know before buying a house?”
The housing market has been crazy the last 2 years!
- Open Houses with lines down the block.
- Multiple offers on new listings over the weekend. (I saw houses go on the market Friday morning and by Sunday afternoon, they had 20+ offers)
- Buyers offering $100,000+ over the asking price.
It was nuts! Now, as covid is calming down and people are ready to get back to “normal,” more homes are coming on the market. At the same time, the Feds are raising interest rates above the 5% range for the first time in almost a decade. (Check out this Historical Mortgage Rate Chart)
Even if they weren’t old enough to really experience the 2008 housing market crash, new home buyers are more aware of what can happen if you get in over your head with a home purchase. Underwater mortgages can cause havoc on your life and finances. So it is best to go into it well prepared.
Know Before Buying a House, How Long Will You Reasonably Live Here?
The ‘American Dream’ is to buy the biggest and best house that you possibly can as early as you can. At least, that used to be the ‘American Dream.’
Nowadays, many of us spend our 20s traveling around the state, country, or even the world following careers and building our lives before settling down.
If you’re not planning to stay in your new home for at least 5 years, most of the time, it simply does not make sense to buy a home.
The average appreciation on a home is about 3% a year. Just enough to keep up with average inflation.
After downpayment, closing costs, moving costs, taxes, and maintenance, most homes do not appreciate fast enough to get your money back when it comes time to sell in less than 5 years.
(The last 2 years may have been a contradiction to the rule. Some markets experienced 12%+ appreciation in 2021. And of course, inflation is around 8% right now. But 3% is the average. It gives you a basic
If you are not planning to stay for very long, due to job changes, family situation, whatever, it is usually better to just rent for now. (Why We Choose to Rent)
Costs to Plan For Before Buying a House
There are many costs associated with purchasing and maintaining a home that many people forget to plan for. Many people just look at the down payment and monthly mortgage payment and then figure they are good. Here are some costs to make sure you are ready for before purchasing a home:
Downpayment
Ideally, banks like home buyers to have a 20% downpayment when purchasing a home. This ensures you have some skin in the game and the bank isn’t responsible for the total cost of the home. By putting more down, you are claiming more equity in your home.
Equity is the portion of your home that YOU actually own, not the bank.
Remember, if you’re purchasing a $350,000 house, a 20% down payment is $70,000.
There are many programs out there to help new home buyers save on their downpayment or even receive grants towards the downpayment.
Low Downpayment Programs
There are plenty of programs out there that help you either need less than 20% down depending on if you qualify:
- FHA (Federal Housing Administration) loans 3.5%
- VA (Veterans Affairs), 0%
- USDA (United States Department of Agriculture) Loans 0%
And others are backed by the federal government to allow certain people low or 0% down payments.
Downpayment Assistance Programs
There are also grant programs to help homebuyers come up with their downpayment. Most are through local or district organizations.
Here in Hawaii, we have a program that helps new low-income homebuyers learn how to save and actually matches their contributions towards their downpayment.
Check your local area to see if you qualify for downpayment assistance. (Check out this list)
Closing Costs
Many new homebuyers, and home sellers, forget about closing costs.
Closing costs usually run from about 3-6% of the home purchase price.
If you’re purchasing a $350,000 home, expect closing costs to be between $10,500 and $ 21,000.
This is money spent on top of your down payment. These are usually paid directly to the companies or contractors doing the work.
Closing costs consist of things like:
- Inspection Fees
- Real Estate Agent Fees
- Escrow Fees
- Appraisal Fees
- Title Insurance
- Property Taxes
- Home Insurance
Make sure to have this extra money available on top of your downpayment when it comes time to buy.
In some cases, buyers may be able to negotiate to have the seller pay most, or all, of the closing costs, but in the recent years’ Seller’s Market, it was usually not an option.
Maintenance Costs
Once you purchase a house, you own it. Gone are the days of calling the landlord to fix things. If it breaks, it’s on you.
Even in brand new or recently remodeled houses, things break.
- Roofs leak (or blow off in storms)
- Water heaters give out
- Raccoons move into attics
- Ovens randomly catch on fire (happened to my mom)
It is said to expect to pay about 1-2% of your home’s value annually in maintenance. (More for older homes)
Of course, you may go years with only needing to change a light build or upgrade the carpet. But other years, a tree may fall on your house, the stove gives out, and the upstairs toilet floods into the living room, all the week of Thanksgiving! (Of course, you’re supposed to host this year.)
This is where I recommend building an Expected Expenses account.
If your home costs $350,000, expect to spend around $5,250 a year on maintenance. Some years it will be more, others less. Divide that by 12 and plan to put away about $438 a month into your home maintenance expected expenses account.
That way, you are ready and financially able to fix whatever comes at you without going into horrible debt.
Before Buying a House, Consider Mortgage Payments (Make Sure to Include Taxes, Insurance, and Interest)
All those wonderful mortgage calculators will tell you just what you can expect to pay on your mortgage, but make sure you include taxes, insurance, and the correct interest rate.
To be financially stable, it is best to keep your home costs below 30% of your gross income. Make sure to do the math before deciding on your home purchasing budget.
In the figure above, you can see that without considering the taxes and insurance, the mortgage on a $350,000 home (30 years, 20% down, with 5.87% interest) is $1,655.41 a month.
BUT when you include the taxes and insurance (and I included the maintenance expectations) it jumps up to $2,567.91.
That’s a rather large difference when you’re trying to figure out if a house will be affordable for you.
HOA (Home Owners Association) Fees
If you are purchasing a condo or home with an HOA, there will be HOA and/or maintenance fees to consider too.
These can add on as little as a few dollars a month to over $1,000 a month depending on the home.
ARM (Adjustable Rate Mortgage)
Here in America, most mortgages are 15 or 30-year Fixed interest rate loans. With these types of loans, your payment (other than taxes, insurance, and maintenance) will usually stay the same throughout the life of the loan.
ARMs are different. When you take out an ARM, your interest rate is only locked in for a few years. Typically 3-5 years.
After those 3-5 years, your interest rate can rise or fall with whatever the current market rate is.
These types of loans are part of what got so many people in trouble during 2007-2008.
If interest rates go up, your mortgage can jump from a seemingly easy to pay $1,655 a month to $2,000 a month, or more, without much warning.
When buying a home, make sure you understand the type of loan you’re getting,
Will the payment stay the same for the entire length of the loan, or can it change with the market?
Make sure to get all of the information in a way you understand before signing anything.
Before Buying a House Consider the Type of Ownership
Whether you’re buying a home on your own, with a spouse, significant other, friend, or business partner, make sure you fully understand the way that you will be taking ownership.
Some of the most common types of ownership are:
- Sole Ownership or Tenants in Severalty– One person owns the property on their own
- Tenants in Entirety– This is reserved for married couples (or in some family situations depending on the state) Both partners own 100% of the property. One can not sell without the other. Creditors can not go after the property unless both partners owe the debt.
- Tenants in Common– 2 or more people own the property. They can have uneven ownership and each can leave their portion to whomever they choose should they die.
- Joint Tenants– 2 or more people own the property. If one person passes, the others have a right to survivorship and the deceased person’s ownership goes to the other owners.
These are the basic forms of ownership and may differ depending on your state. Make sure to discuss ownership with a real estate attorney if you have any questions as to what type of ownership would best suit you. (I’m not associated in any way with this attorney, I just liked how they explained the ownership)
Lawsuits and other financial issues can ensue and tear apart families and friendships if you do not choose the correct form of ownership when purchasing with others.
Wrap-Up
Buying a house is one of the biggest, if not THE biggest, purchases most people will make in their lives.
A house is a huge financial decision. It can be an investment. Most importantly, a house becomes your home.
Before jumping into one of the largest financial decisions of your life, make sure to take a moment and account for ALL the aspects of homeownership.
If the numbers work, and it’s what you truly want to do for yourself and your family, go for it!
These are some of the top aspects I ask my clients to consider when buying a home. If you’ve bought a home before, what do you wish you had known before making the jump?
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Thanks!
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