Home ownership can be a tricky interplay between want and need. There’s the lure of the classic American dream—a house with a white picket fence (or whatever conjures “home” for you) that you can call your own. But does that dream make financial sense in your reality? To buy or not to buy?
Answering that question should not be a snap decision. Make it an opportunity to assess where you stand with your finances, your lifestyle, and where you really want to go from here.
Clean Up Your Act
If homebuying is on your horizon, run a thorough health check on your finances. If you’re weak in one or more of the following areas, consider putting homebuying on hold:
Reduce debt.Get as close to zero as possible. Lenders typically look for a debt load of no more than 36% of your gross income. That includes mortgage, credit cards, and loans. The less you spend on debt, the more money you’ll have left over for savings, investments, and discretionary spending.
Raise your credit score as high as possible. The better your rating, the lower the interest rate on your mortgage. A high score can save you thousands or tens of thousands of dollars over the life of your loan.
Save…for the expected and the unexpected:
- At least a 10% down payment on the house. The more you put down, the lower your monthly mortgage payment. If you bring a 15-20% down payment to the table, you’ll avoid the private mortgage insurance requirement (PMI), which protects the mortgage company in case you default on your loan.
- Transaction costs such as title fees, points, commissions, taxes, and inspections. These fees can add thousands of dollars at closing. Your lender should be able to give you a rough estimate of total closing costs.
- Moving costs. Whether you hire a mover or rent a truck and DIY, include these expenses in your home buying budget. Remember to account for the cost of setting up your utilities, furnishing the new place, and even purchasing necessities like appliances (or a lawnmower!) that may not come with the house.
- A house emergency/repair fund. The suggested amount varies according to the condition and age of your house and whether the home inspector uncovered a major repair in your near future. From 1%-4% of the cost of your home is a good target. You can also purchase a home warranty to cover major repairs. We also recommend building a “sinking fund” into your budget for those expected but unknown and ongoing maintenance items.
Run the Numbers
- Calculate your income and current monthly expenses.
- Add in your mortgage, property taxes, homeowner’s insurance, emergency/repair fund contribution or home warranty payment, and the cost of any additions, renovations, and furnishings you plan for your home. With this new fixed expense, you may also need to protect your family with additional liability, life, or disability insurance policies.
- Don’t forget to include maintenance, whether you hire out chores or purchase the equipment to DIY. These can include house cleaning, lawn maintenance and landscaping, gutter cleaning, painting (inside and out), pest control, and more. A homeowner’s association or condo fee may also be relevant.
When you add house expenses into your budget, does your income cover them? Do you have money left over for other financial goals and a lifestyle you find fulfilling? How much will your long-term savings suffer?
Do Some Soul Searching
Now it’s time to connect your head to your heart. The impact of home ownership on your quality of life is just as important as on your finances. If you’re unhappy with day-to-day living, a house is not a good investment at any price. Ask yourself:
- Are you settled enough to stay in your home a minimum of 3-5 years? Otherwise, buying a house may be a burden you regret and a money-losing purchase. Think twice about becoming a homeowner if you’re still moving frequently to advance your career or exploring which locations you like best.
- What are your must-haves? If you’ve got or plan to have kids, the quality and location of schools are paramount. (They also weigh heavily on the resale value of the house). Does your beloved pup have room to roam or is a dog park nearby? If that adorable cottage with a view doesn’t have enough bedrooms, is it really love at first sight? Will you be able to live with your new commute in the long run?
- What kind of lifestyle suits you best? Are you ready to reign in your travel budget to pay a mortgage? Do you want to be in walking distance of local shops and restaurants? Are you ready to devote evening and weekend hours to household chores? Do you need wide open spaces or is an in-town duplex or condo more your style?
FJY knows how much preparation goes into the decision to buy a house. Contact us and we’ll strategize on how the home of your dreams fits with your other financial and lifestyle goals.