As I've mentioned before, most of the topics I write about in this blog come from the casual (and sometimes not so casual) questions people ask me every day. One of the big topics lately has been buying a home. You'd think that with all of the pressure on Americans to buy their own homes, we would feel a little more comfortable with the mechanics of it. But most of us end up confused or frustrated at some point in the process. To help prevent that, here are a few things to think about if you are considering a new home.
It's your life
Let's start with the obvious. Some of us buy because we are dreaming of that home. Some of us, though, are just feeling like buying is something we are supposed to do. Yes, a home can be a great investment, but like all investments it can go really badly. Before you buy for investment purposes read this post.
Likewise, buying can make you feel more grown up if your idea of dinner at home is a take out carton and a coffee table you picked up on Craiglist. But homeownership is a pretty expensive way to impersonate a grown up. If you are thinking of spending hundreds of thousands dollars to buy a new place, make sure it's a decision that works for you. Put aside any and all advice from well-meaning family, friends and real estate agents and really weigh whether at this particular point in your life (whenever that is) you actually want to be a homeowner. If the thrills of home decorating don't make up for the frustrations of home maintenance for you, maybe you'd be better off getting a real kitchen table and throwing the extra money in your retirement account. If you do want to be a homeowner...
Do the math
There are a thousand and one mortgage calculators on the web to help you figure out how much you would pay per month and in down payment for the house of your dreams (or a smaller replica of the house of your dreams). I've already posted a basic explanation of how banks calculate your mortgage qualifications.
But it isn't just about what you can afford. Be sure to think about the what you actually want to pay given your other monthly expenses and opportunities. Mortgage payments, like rent payments, fit into the category of "fixed expenses," the things that you can't negotiate if you have a difficult month. It's one thing to cut out the fine dining, put off a trip or cut down on your retirement contributions for a bit; it's a whole other thing to be tied to a high mortgage payment if your income suddenly goes down. Which means you want to do some real soul searching about how much of a mortgage payment you are ready to carry, no matter what happens.
Not So Hidden Costs
We all know there are extra expenses to buying a home, but they look pretty inconsequential next to the home prices themselves. They seem a lot less inconsequential on closing day when you actually start to pay them. From the beginning of your search, keep this list in mind and be ready with cash on hand. And of course, bargain with everyone from banks to sellers for the best deal.
The first of the "extra" costs is the real estate agent's commission (typically 6% split between the seller and the buyer agents). If you are smart, you'll also pony up for a home inspector whom you trust—you will feel pretty stupid if you scrimp on the few hundred bucks here and find yourself with thousands of dollars in surprise repairs later.
And then there are the famous "closing costs" that come due on the day you get the keys for your new house. In total closing costs generally range from about 2% to 5% of the value of the property, though it's not unheard of to see that percentage go all the way up toward 8% (ouch).
- Bank Fees (the bank giving you the mortgage may charge an origination fee, "discount points", credit report or loan application fees, title search and title insurance fees, a charge for the appraisal, and the initial interest payment)
- Initial property tax payment
- Charge for a survey of the property
- Homeowners Insurance
- Attorney fees (for your attorney)
- Recording fee (to your local government records office when you file your new title)
Your closing costs will be lower if you get tough with your lender from the start (be sure to ask the bank for a Good Faith Estimate—they are required to give it to you by law!). Costs can be shared with the seller if you and your agent negotiate well, and if you've got a little extra room in your mortgage limits, some of these costs can be rolled into your mortgage. This is the place where having a good agent and communicating well with your bank can make a huge difference.
Don't Rush the Process
In all likelihood, you won't end up buying the first home you think you want. Plan to spend at least 3-4 months becoming familiar with the market and just as importantly, focusing in on what you really want. Real estate agents are notorious for bringing clients to homes that only loosely fit the client's "wish list." It's not that your agent wasn't listening to you; it's just that agents have learned from experience that most people only realize what matters to them most by looking at a lot of different properties and changing their minds over time.
Patience can save you money on your home price. And it can save you money after closing. The adrenaline rush of buying a house tends to send new owners into a follow-up frenzy of furniture shopping and DIY projects. This is all made worse by the fact that the $6,000 dining table no longer looks as expensive when compared with the $600,000 condo. By all means, pick up a new couch if you don't have one from your old place. But you'll save money and be happier with your home in the long run if fill in the gaps slowly (or at least wait until $6,000 looks like a big number again).
At this point it might look like I am trying to dissuade anyone from buying a home. I'm not. Buying a home is an exciting process. If this is the next big purchase for you, start by asking people you know about their own experiences. How was their lender? Who was their agent? Their home inspector? Which areas of town did they search? Why did they buy where they did? What would they have done differently, if anything?
The home hunting season starts up in late February. Good luck!