Homeownership has long been an integral part of the American dream, so it’s only natural for young professionals to feel the itch of first-time homebuyers. Add to that the thin walls in your apartments and putting your hard-earned money into your landlords’ pockets, and becoming a landlord sounds pretty cool.
But the dopamine rush from daydreaming about decorating your own space can quickly cloud your judgment. In fact, taking charge of a 30-year mortgage and upkeep of a property is a big deal. Not everyone took a crash course in home maintenance or financial management during their studies. Before you take the step towards homeownership, consider these three questions to determine if you are ready.
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1. Does your savings account meet homeownership requirements?
You’ve been hiding money like crazy since your upstairs neighbor’s nightly gaming sessions disrupted your sleep schedule. But do you have enough money to go from renter to first time homebuyer? In addition to the cost of your down payment, closing costs, and various fees, have you considered the ongoing impact on your budget?
First, make sure you fully understand the true costs of buying a home. This is especially important when considering different mortgage options. Conventional mortgages have different requirements than other categories such as VA or giant loans. Before you know what’s available to you, you need to consider your credit score and the amount of down payment you can afford.
Most first-time homebuyers consider loans from the Federal Housing Authority, which offers great rates and a low down payment. Typically, applicants with a good credit history can contribute as little as 3.5% towards a home purchase.
This low down payment makes the purchase more affordable, but can also entice shoppers to save on savings. Get your homeowner’s budget right by working with real numbers rather than assuming you can afford the maximum loan approval amount. Be prepared to cover all closing costs and save for immediate fixes and projects. There is no guarantee that the seller will share these costs, so factor them in with the down payment.
2. Are you willing to spend time and money on house maintenance?
Renting has its drawbacks, but one of the main advantages is the lack of responsibility for the upkeep of the house. If the heating element in your oven fails, the landlord must fix it. And if the lawn needs to be mowed, a landscape designer will do it while you’re in the office. Just like you need to plan for buying a home, you need to set aside time and money for maintenance.
View potential utility and property taxes, and estimate the monthly maintenance for the target home type. Use your local utility provider’s tools to tabulate your heating and cooling costs per square meter. Talk to your real estate agent to find out about average mechanical and yard maintenance. Think about one-time expenses like a lawn mower and trimmer, as well as monthly fuel purchases. Also, consider if your home is outdated and likely to require extensive repair in future.
Then think about how much free time you have today and whether you are ready to use it at home. If you love going to brunch, running in the park, or going on weekend trips, think again. Buying a house won’t eliminate these activities from your life, but it will require a change. Decide if you will perform the necessary maintenance tasks yourself and adjust your free time expectations. Or consider whether your budget allows you to hire professionals to do the job while you live your current lifestyle.
3. Do you plan to stay there for a while?
Mortgage loans are most often issued for a 30-year term. And, as with most other loans, interest is included in your repayment schedule. This means that for the first few years of payments, you will allocate more interest to paying interest rather than principal. If that sounds unfair, take a look at your other loans. This method is a standard practice that helps loan issuers protect their investment in your ability to repay a loan.
Understanding a loan’s repayment schedule can help you determine the break-even level. It is important to know how long you will need to stay at home for this to be a good investment. List the amount you plan to bring before closing, moving and cleaning costs, and any initial repairs. Add this number to your total investment. Then use the latest real estate sales data from your agent to assess potential capital.
While you can’t know exactly when you’ll be able to break even, assessing this can help you make the right choice. Generally, experts recommend that first-time homebuyers stay in their homes for at least five years to make it a good investment. If your job is likely to involve translation soon, or if your partner wants to get closer to the family, wait. But if you’re firmly rooted in your chosen field, this could be a great time to take the plunge.
A strategic approach to finding a home
Look at your potential home purchase as a strategic investment. In addition to serving as your landing place after work, your home should also work for you. Home ownership is often fundamental to overall wealth accumulationtherefore, the strategic choice of a home can affect your financial future.
If you choose a beautiful but expensive place to maintain, you could end up underwater for a year. But if you choose a home that is in good condition and can be valued, it can increase your net worth. When you enter your carefully selected home, you can relax knowing that this is a solid investment that you can afford.
