If you aren’t yet a homeowner but expect to be one in the next few years — maybe you’re engaged to be married — you have a golden opportunity to get started on the right foot. Here are a number of ideas to consider.
Don’t Overlook These Costs
When comparing renting an apartment and buying a house, many would have the same response: “Why waste money on rent when I can buy a house that I’ll own? Besides, I can deduct the mortgage interest!” At first glance these arguments make sense. What is often overlooked however, are the substantial costs of home ownership, including the following:
• Purchase costs, such as a down payment and the expense of obtaining a mortgage, including points, title fees, and loan-processing charges;
• Ongoing costs of ownership — property taxes, insurance, utilities, gardening, and other expenses that increase the cost of home ownership in relation to the rental charge of an apartment;
• Selling costs, including 3 to 6 percent of the sales price as a commission (unless you sell it yourself or work out a special arrangement with your realtor) and other selling expenses.
In addition to the costs noted above, it normally takes quite some time to build equity in your home because most of your monthly payment in the early years of a mortgage is applied to interest. As an example, if you take out a 30-year mortgage for $200,000 at a 6 percent interest rate, you’ll pay almost $12,000 in interest out of a total of $14,400 in payments during the first 12 months alone.
The Issue of Stability
Most people in their early 20s find themselves in a rapidly changing environment — from finishing college and starting a career to getting married and starting a family. These life changes frequently result in multiple moves, which, based on the costs noted above, would be very expensive in the event that you owned a home.
By taking all of these factors into account, most young couples would be better off keeping their initial housing expenses low and maintaining the flexibility that renting provides. Once you have settled in your career and have a higher degree of certainty that you’ll remain in one location for a long period of time, it would make sense to start looking for a home. As Proverbs 24:27 reminds us, “Prepare your work outside, get everything ready for you in the field; and after that build your house.”
Here are a few questions you can use to determine when purchasing a home makes sense:
• Are you reasonably sure that you’ll live in the home for at least five years?
• Do you have a stable job?
• Do you have the means to make an adequate down payment (preferably 20 percent)?
• Are you living on a budget?
• Are you planning in such a way that provides the maximum opportunity for a full-time parent to nurture the children at home when that day arrives?
Taking the Plunge
Once you’ve determined that you’re ready to buy a home, what are the steps you should take to make a good decision? The first thing you need to do is to complete what is called a “pro-forma” budget. This is simply a forecasted budget for the first year you own your home. It would include your anticipated house payment, property taxes, insurance, utilities, gardening, and improvement costs that you expect to incur on an annual basis along with all your other regular bills. Especially if the house is older, you’ll want to factor in a reasonable amount for ongoing repairs, such as the replacement of a roof. That way, when you visit the bank, you’ll be able to tell them how much you can afford rather than letting them tell you what you can qualify for. Remember, the more money they loan you, the more money they make. Most banks use a formula that leads to a debt burden you’ll find oppressive (40 percent of gross income allowed for all debt payments).
Another tip to keep in mind when you’re searching for a loan is that most buyers fall into the trap of focusing on keeping the monthly payment as low as possible rather than on the amount they’re borrowing and how long they’ll be in debt. This leads to creative financing that keeps you in debt for a lot longer than you should be and makes you pay a lot more interest than is wise.
You’ve heard the real estate mantra before, “Location, location, location.” Along with determining ahead of time how much house you can afford, and making smart financing decisions, this is one of the most important factors to consider when buying a home. It will impact how happy you will be while living there and your ability to sell in the event you choose to move in the future. Is the location a desirable one? Will your commute to work be reasonable? Are you within a desirable proximity to family? Is the regional economy growing and does it appear well-poised for the future? Are the schools in the neighborhood highly regarded? Are the other houses in the neighborhood well maintained? Are the neighbors friendly? Are there any zoning issues that would be of concern (such as a retail center being built on the open lot behind you)? Go door to door and visit with potential new neighbors. It will be well worth your time. Make sure the home receives a thorough inspection. You should do much of this on your own, but it would also be a good idea to bring in a professional whom you trust. Structural problems found after the purchase is complete can be a major headache and very expensive.
Before making an offer, be sure you have a good understanding of the recent sales activity in the neighborhood. Your real estate agent will be able to provide you with a Comparable Market Analysis, which shows pricing information for homes currently on the market and those recently sold. It also provides summary information about those homes, including overall size, number of rooms, and so on. This information helps the buyer and seller understand what’s reasonable when it comes to reaching agreement on a price.
Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at [email protected].
