Buying your first home is an exciting time, when you’re making the biggest transaction of your financial life. It’s hard to stay emotionally detached from a home purchase, and many people before you have spent more than necessary, blinded by the attraction of that “perfect place.” When you’re not familiar with the home buying process, it’s easy to overlook, forget, or just plain not know about all the costs involved. Not only are you looking at the bottom line cost of your house, many expenses that you must decide on now may have significant impact — for better or worse — down the road. Here are some points to consider to start out as a savvy homeowner.
Are You Ready?
Perhaps the most important aspect of home ownership is you. There can be much pressure on you to buy a house, when you see your friends settling down, or when your parents suggest it’s time. However, if your priorities are travelling the world or indulging in an expensive hobby, it may not be the right time for you. Ultimately, it comes down to your time and your money, and no one should be spending it on your behalf.
One sign that it’s time to buy is your attitude toward the questions about home ownership that arise. You may feel that saving 10 or 20% to put down on a house is impossible when you’re putting aside $5,000 to visit France. Then, perhaps suddenly, one day the travel money seems less necessary since it will delay saving for a home. That’s a representation of value. As the value of owning a home climbs in your mind, you’ll automatically feel a shift in your spending priorities. Focus on these and the you’ll know when it’s the right time for you to buy.
The Contingency Clause
Buying a house takes time, and with time, things happen. An unexpected layoff or failed financing are just two scenarios that can scuttle your home-buying plans. If you’ve already spent money to ensure your new home — called earnest money — you may stand to lose it without a contingency clause, and you may remain obligated to buy the house. Discuss contingency clauses with your realtor. There’s more than one clause, so be sure to select the ones that are most appropriate for your situation. This will get you out of the deal, and get your money back, if the worst happens.
Shop for Your Mortgage
You may have dealt with XYZ Bank since your first job in high school. You may feel loyal to them, and by all means, get a mortgage quote from them. Don’t assume, however, that your loyalty will be rewarded when it’s time to buy a house. Sure, it may be, if you know the bank president by name, but it’s far more likely you’ll find a better deal elsewhere. Comparison shopping on a purchase this large isn’t only a good idea, it’s perhaps critical to your future finances.
Don’t look at your monthly payment on its own. A 30-year mortgage will cost you less each month, but you’ll spend more on interest over the term. The best rule of thumb is to choose the shortest mortgage term where you can afford the monthly payments, with your home ownership costs (mortgage, insurance, taxes and utilities) less than 40% of your after tax earnings. That percentage varies, depending on real estate market conditions where you live, but it’s a good rough starting point. If you’re still paying off student loans or credit card debt, your scenario may also shift.
The Home Inspection
Another expense that becomes a false economy if you decide to risk proceeding without one is the home inspection, even if you’re buying a newly built home. A thorough home inspection from a trained professional can steer you away from a money pit, but it’s also possible that the inspector can save you money on the house you want. You can lower your offer to accommodate the cost of repairs identified by your inspector. Better still, you may make an offer conditional on the repairs being done by the current owner. Even if your home inspector finds nothing, you’ve paid for the peace of mind of knowing your new home is in great shape.