What To Consider Before Buying a Home
Are you looking to buy a home? Here are some things to consider before you catch home buying fever.
Buying a home is incredibly exciting. Here are four things to consider before going shopping.
Location, Location, Location
Realtors agree that the most important consideration when looking at real estate is where the home is located. This matters for many reasons, and you should think of location from multiple perspectives.
Ask yourself where the home is relative to where you spend your time. For most people, the majority of time away from home is spent at work. I recommend buying a home within 10 miles of your employer if working remotely is not an option. If you’re on the road for your job, find a place central to the territory you cover. The costs of commuting long distances are real and impact not only your wallet but your time and mental health as well.
Consider also where the home is relative to local schools. If it’s squarely within the boundary lines of a desirable school system, the home value is likely to be maintained or even increase. However, if you buy a home on the border of a school boundary or in a less desirable school district, the opposite might be true.
Lastly, consider the home relative to its surroundings. Buying the best home in the neighborhood is not the worst decision, but it could make it difficult to get full value if you sell in the future. This is true because the home will be competing with others nearby that will likely be priced lower. Also, think about things like the location of roads, vacant lots, and businesses. Road noise can be irritating, and traffic can be dangerous for young kids and pets. Vacant land gets developed and businesses change. Understand how each of these factors might impact your quality of life and the home’s future value.
Build Your Savings
Before you buy, you should increase your emergency savings. Buying a home is going to add several new fixed expenses to your budget. The new costs you’ll take on include your mortgage payment, real estate taxes, homeowner’s insurance, HOA fees, and maintenance. It’s not uncommon to spend 1% or more of a home’s value each year on maintenance, especially if the home is older.
You’ll also need to save for your down payment. Putting 20% down on a home is best because it eliminates the need to pay for mortgage insurance. This is an additional cost you’ll incur when you put down less. The amount you’ll pay for mortgage insurance depends on the loan program you use, but spending 1% per year of your loan amount is pretty common. If your loan is conventional, then mortgage insurance can be dropped from your payment when your equity position reaches 20% of the original loan amount. Another reason a larger down payment is best is that it makes you eligible for loans that tend to carry better rates. Government-backed loans, like FHA, VA, and USDA tend to have lower down payment requirements but higher finance rates relative to conventional loans.
Finally, save for closing costs. These are the fees paid to your lender and the professionals that help you complete the home purchase transaction. According to the National Association of Realtors, closing costs can run as high as 5% of the sale price, but they are often either rolled into the home price or paid by the seller as a concession to the buyer. This is not always the case, so save for closing costs.
Given the amount of cash you’ll need to make your purchase, you may be tempted to invest the money to reach your goal quicker, but this would not be best. It is better to save aggressively than to invest that way when it comes to your down payment. Other options for raising the necessary funds include taking a loan from a company retirement plan, making a qualified first-time home purchase distribution, or withdrawing funds from an IRA. These options are less ideal but are options nonetheless.
Consider the Stability of Your Job, Employer, and the Local Economy
It goes without saying that your income should be stable before you embark on a home purchase, but consider other issues.
Is it likely that you will be asked to move elsewhere for your job? If so, buying a home might not be in your best interest because real estate transaction costs are high. Renting out your home is an option, but I have never heard of someone who did this over the long-term having a positive experience. Managing a renter or finding tenants for that matter, is time-consuming.
Is your company considering a move to another location? Startups experience significant growth in the early years and may change locations to keep up with staffing demands. If your company is likely to move locations, your commute may increase dramatically. This will not only impact your transportation expense, but there is a cost related to your time as well.
Finally, what is the state of the overall job market in your area? If jobs are limited and there are few nearby employers, buying a home may limit your prospects. A lack of local jobs may also make it difficult to sell the home to someone else in the future. Living nearer to cities tends to offer the best opportunities for work, and the further you move away from one, the more opportunities diminish.
Don’t Fail to Understand What Motivates Lenders & Realtors
Both lenders and realtors are paid commissions for the work they do on your behalf. Those commissions are typically a percentage of the sale price of the home you buy, which means there is an incentive for these parties to encourage you to buy the most expensive home you can afford.
This does not mean that they will do that or that these professionals are bad people, but it does mean that they operate with an inherent conflict of interest that you need to understand and navigate.
For this reason, it would serve you well to set your own limits on the amount you’re willing to spend before you go shopping for a home. This can be accomplished by sitting down with a financial advisor and completing a Home Affordability Analysis. You can receive an unbiased opinion on what you can afford, given your income, expenses, debts, and other financial goals.
Buying a home is a wonderful experience and pausing to consider its impact on your life and other financial priorities is wise. If you’re considering a home purchase and want some unbiased advice, please contact us today.