First-Time Buyer Tips
Ah, welcome to the American dream of owning your own home! You’ve worked hard and long, and maybe with a little luck, you’re in a position to purchase your first home.
What should you be thinking about?
Your heart may lead you to a home that fits your lifestyle or aspirational lifestyle. That said, a home is also an economic choice. We aren’t advocating for lifestyle vs. economics, but instead are suggesting that you clearly understand both of these factors so that your lifestyle doesn’t sabotage your economics. The house you love may be the biggest and most expensive in the neighborhood, which will likely negatively affect future resale, so if you go for it, know that you made this choice.
Speaking of resale, you may not be thinking of that while making your first home purchase. First time home buyers typically stay in that first home for 11 years. This means that eventually, you’ll probably need or want to sell your home. Ask yourself: Is your first home going to be easy to resale, when it is time?
Part of every sale and resale is the question about schools. Better schools in your future neighborhood will help with resale. Better schools with tremendously higher property tax as a result may not. So if your first time home doesn’t have space for school-aged children, but has the relatively high property tax to cover the cost of excellent schools for your neighbors, you might want to reconsider your choice.
The true cost of home ownership is beyond your mortgage and insurance payments. The cost of upkeep should also be considered. You’re going to have to eventually replace the roof, HVAC system, and garage door. You will need to maintain lawns, paint and gutters. While it’s not part of the usual mortgage lending process, these costs should be factored into your budget.
Post the 2008 downturn caused in part by irresponsible lending and financial bundles of those loans, many buyers can still qualify for more loans than may be budgetarily prudent. You might actually sleep better if you need only the smaller of you and your spouse’s/partner’s income to cover your home costs. If we’ve learned one thing in this pandemic, it might be that financial surprises can be very unexpected and quite sudden.
You can save some of your monthly home costs if you put a down payment of 20% or more. Otherwise, you may see PMI on your bills. PMI stands for Private Mortgage Insurance and is required by many conventional loans if you have less than 20% for your down payment. It is extra insurance, and typically goes away once your equity in your home meets and exceeds 20%. Unlike mortgage interest and property taxes, there is no tax break for PMI.
If you’re going to keep saving until you can get to that 20%, you can also use this time to improve your credit score. Check it out now, as it will definitely affect your interest rates and can even prevent you from getting a loan if it’s really low.
Also check out a buy vs. rent calculator comparison. It can be eye opening to see how you’ll fare continuing to rent, and what kind of purchasing targets make sense from a purely financial perspective. There are many out there, but the best one we’ve found was published by the New York Times. It’s free, and takes only a few minutes.
Lastly, while we’ve talked a lot about finances here, your home is where you and your family are going to live. Don’t make it all about finances, but do go in eyes wide open. Make the smart choices that work for you, and you’ll be able to sleep soundly and well in your new bedroom.