Buying your first home is a significant milestone. It represents years of planning and hard work—scraping together a down payment, saving up for the unexpected, and fully committing to a place for the next chapter of your life.
For these reasons, buying your first home is no easy financial feat. Combine a sizeable down payment with skyrocketing home prices and the highest mortgage rates in recent memory, and the task can feel nearly insurmountable.
In this article, we’re here to demystify the buying process—not just on the financial side, but on the emotional side as well.
Should You Buy or Rent a Home Right Now?
Before we get started, we should note that it can sometimes make more financial sense to rent than to buy. Here’s a few reasons why:
- Flexibility. Renting requires lower upfront costs and can free up your cash for other priorities, such as investing for retirement.
- Market factors. Supply constraints, strong demand, and interest rates all contribute to high home prices across the country. Renting avoids the risk of overpaying—or locking in unfavorable mortgage terms.
- Maintenance. Renters avoid expenses like property taxes, repairs, and maintenance. The expenses of owning a home quickly add up.
The decision to purchase a home is deeply personal. Nobody but you can ultimately make the decision as to whether you should buy a home. While the dollars and cents are a very real consideration, major life decisions must necessarily transcend the financial side of things.
If you’re mentally and emotionally committed to buying a home, let’s talk about the factors you need to consider.
Evaluate Your Financial Readiness
First, you’ll need to figure out how ready you are financially. This step analyzes your financial situation to help you set a realistic budget.
- Determine where you’re at today. Take a hard look at your income, savings, and expenses. Do you have a significant debt load? Is your income predictable? Do you have large upcoming expenses? How secure is your job?
- Understand the rules. A common guideline for buying a house is the 28/36 rule. This rule states that you should spend no more than 28% of your monthly income on housing, and no more than 36% total on debt service.
- Check your credit score. With relatively high mortgage rates, the importance of a strong credit score is amplified. While it’s not the be-all and end-all of negotiating your rate, it’s a crucial factor for paying less over the lifetime of your mortgage.
The future is impossible to predict, which makes buying a home even more difficult due to the stalwart certainty of a monthly mortgage payment. After you determine your maximum possible budget for a home, consider looking for options below your means. While it might mean choosing a home that’s smaller or less than ideal, this slack can make a significant difference if you lose your job or come across times of unexpected financial hardship.
The True Costs of Owning a Home
When we consider purchasing and owning a home, there are two main categories of costs: upfront costs, and ongoing expenses. Let’s take a closer look at both.
The Upfront Costs of Purchasing a Home
The down payment is the most well-known and widely cited upfront cost of purchasing a home. But did you know that you’ll need to save up more than that before you buy?
- Down payment. Depending on your loan type, you’ll typically need to pay between 3% and 20% of the home’s purchase price upfront.
- Closing costs. Expect to pay an additional 2% to 5% of the price for fees like inspections, appraisals, surveys, title insurance, and other charges.
- Moving expenses. Don’t forget the cost of relocating, which can include hiring movers or renting a truck.
- Furnishing and decoration. Often overlooked, fully furnishing a home can add significantly to your upfront costs. The price tag will fluctuate depending on your needs and desires, but it can easily reach into the tens of thousands of dollars.
These upfront costs can add up quickly, so it’s critical to plan for them. Don’t skimp out on inspections, either, as they can reveal hidden problems with the home that can give you leverage in your negotiation.
The Ongoing Costs of Owning a Home
Once you’ve moved in, the financial commitment doesn’t end. Everyone knows about the mortgage, but there are other recurring expenses:
- Property taxes and insurance. These costs vary by location but are necessary and non-negotiable. If you’re moving into an area prone to natural disasters, verify that insurance is actually available before you purchase.
- Repairs and maintenance. From minor fixes to major system replacements, you’ll need to budget for upkeep. When was the last time the roof was redone? Is your HVAC system working properly? Are there any big maintenance items that the previous owner has been deferring?
- Utilities. As a homeowner, you’ll be responsible for all utilities, from water to trash services.
What is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is a way for lenders to protect themselves when they make riskier loans. If your down payment is less than 20%, many lenders require the buyer to purchase PMI, which adds to your monthly mortgage payment and can increase the overall cost of homeownership.
For this reason, buyers should carefully consider their down payment amount. High housing costs can make a lower down payment enticing, but the less you put down, the more your monthly payment will be, especially if you’re required to purchase PMI.
How to Prepare for the Homebuying Process
You’ve been saving money and getting acquainted with the basics. Now, it’s time to learn about the actual process of buying a home.
- First, consider getting pre-approved for a mortgage. A pre-approval gives you a clear idea of how much you can afford and shows sellers you’re serious. In competitive housing markets, pre-approval may be a requirement.
- Next, research the local housing market. Housing is an inherently local market. Take time to learn about prices and norms in the area where you want to buy so you can set realistic expectations.
- During your research, establish your non-negotiables. Identify what’s most important to you in a home. Knowing your must-haves will help you stay focused as you search.
Finally, assemble an experienced team. You’ll need professionals like a trusted real estate agent, a mortgage lender, and a financial advisor to help you integrate your big purchase into your overall financial plan.
The importance of an integrated team cannot be overstated in the homebuying process. For many of us, buying a home is the single largest financial transaction of our entire lives. Because you’re reading this, you’re obviously aware that some level of planning should go into it—but having experienced advisors on your side can make a world of difference.
From the long-term tax benefits of homeownership to estate strategies that can protect what you’ve earned, the Wealth Enhancement RoundtableTM is a comprehensive team of financial specialists that covers your financial life from every angle. Consider booking a complimentary introductory meeting today as you prepare to buy your first home.
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