So you’ve decided that you’re done throwing rent down the drain and want to purchase a house that allows you to build equity. While it’s okay to be excited, you need to make sure you’re prepared. There’s a lot that goes into buying a house and it would be smart to do a little research prior to diving in.
5 Things to Think About
Home ownership is something most adults aspire to. Some people are fortunate enough to purchase a house when they receive their first full-time job, while it takes other people decades to get their financial ducks in a row. But whether you’re 25 or 50, there are some important things you’ll need to think about before proceeding.
- Pre-Approval vs. Affordability
Every home search should start with a pre-approval. By providing some basic financial information to a few lenders, you’ll get an idea of how much house you can buy. But don’t confuse the idea of an approval with the concept of affordability.
Just because you get approved for, say, a $300,000 house, doesn’t mean you need to spend that much. You could probably spend $250,000 and still get a quality house that fits comfortably into your budget.
- Down Payment
One of the reasons for spending less than your pre-approval amount is that it allows you to make a larger down payment. Not only does a large down payment lower your monthly payments, but it can also reduce the cost of the loan.
A loan where you put zero- to five-percent down may seem like a great deal, but it’s going to cost you in the form of private mortgage insurance (PMI) – which will amount to between $30 to $70 per month for every $100,000 borrowed. In order to avoid PMI, you need to put 20 percent down.
- Cost of Home Ownership
Home ownership isn’t as cheap as it looks. You’ll learn this from the very start, when you have to fork over a bunch of money in the form of closing costs (which include attorney fees, escrow fees, prepaid interest, property tax, loan origination fees, recording fees, etc.).
“If you add them all up, typically you’ll end up paying roughly 2 percent of the purchase price in closing costs,” Green Residential explains. “On a $250,000 home, this means closing costs will be roughly $5,000. The money will be due on the day of closing.”
Other costs of home ownership may include annual property taxes, homeowners insurance, HOA fees, utility costs, landscaping, and home maintenance and repairs.
- Resale Value
In all likelihood, the first house you buy won’t be the last. Your family will grow, your income will go up, and you’ll have different tastes, needs, or interests in the future.
Having said that, you need to think about the resale value of the home you’re buying. Is it in a good neighborhood? Are property values increasing? Does the house have widespread appeal?
- Hiring an Agent
You might think buying a house is just like buying a car, but it’s not. There are so many different legal and financial issues involved. Hiring an agent will ensure your best interests are protected.
Take Your Time
You’ve never made a purchase decision that’s as important as this. While you’re probably feeling a lot of emotions right now, you need to take your time and do your due diligence. Never enter into a real estate transaction when you feel pressured or don’t have all of the details. Your discipline will eventually pay off in the form of a house you can be proud to call your own.