I am in an industry that is heavy on mortgage lending, and the less scrupulous lenders love to corner renters and say, “But you could save so much money if you’d buy! Interest rates have never been lower, and you’d be building equity! If you’re paying $1500 to rent, you could be paying $1100 to own!” It’s hard to say no to an extra $400 in your pocket every month, but before you start down that road, you need to find out if you get to keep that $400.
My sweet friend, Gina, wrote this piece regarding homeownership and I asked if I could repost it here. I would encourage everyone to read it, especially first time home buyers. I’ve been through the buying process before, and her words pointed out a thing or two that I hadn’t thought of then, but will definitely consider for later.
Take it away, Gina:
Can I Afford This House? (or Is it the Right Time for Me to Buy?)
I muddled over the idea of buying for many years. I’d always been a renter. I was raised the child of a renter. Owning seemed like something others did. One day it dawned on me that I wanted in on this. I wanted Home Pride, and to own a tiny little piece of something. I watched the market go up up up and then down down down. I really had very little concept (and honestly still get confused on how to figure compounded interest, and wonder exactly what escrow is), but I knew when it hit the lowest that if I was going to dive into this pool, this was the time to do it.
Fortunately by sheer luck I found a very patient, very astute real estate agent. Unfortunately, there was still so much I didn’t understand beyond mortgage payments. Below is a small list of “Should Considers” I wish somebody had written, and then stapled to the front door of the condo I bought. I don’t know with certainty if it would have made a difference, but perhaps my lack of complete understanding will help someone else.
If you are like a portion of the population who has scrimped and saved for years to get that perfect 20% down payment, buying right now, just might be the right answer. You probably will never see interest rates which are reaching down into low 3%’s ever again. The market is a free for all, made for buyers with low cost opportunities in short sales, and foreclosures, as well as bottom of the barrel priced standard sales.
The first question you need to settle is “What can I afford?”.
Generally speaking a mortgage lender will sit down with you, go over your finances, and income and the two of you will come to a conclusion on what is within your range of affordability. Remember, nowadays most lenders do not want to put you into a place you can’t afford, because your failure is their loss.If you’ve rented your entire life, understand a few basics that will increase, or perhaps for the first time become your concern.
New utilities: Generally speaking a renter pays electricity, gas, and cable. Most apartments cover the cost of water, and trash. Some even cover a few of the aforementioned. Maybe you’ve spent a lifetime only paying electricity.
Ask the questions and take a look at if your dryer line or water heater is gas or electric. Who would your ultility company be? Ask neighbors if they can give you a ballpark figure on what the water rates are, because they could differ greatly in your new area. If you’re new to this utility company understand you might get hit with a security deposit as well.
HOA’s or Homeowners Association Dues: Ever drive through some of those affluential neighborhoods with the perfectly manicured hillsides spelling out the community name in plants and hedges? With greenbelts that look like golf courses? Community swimming pools and tennis courts? Wonder how they got there, or are so well taken care? That that would be your neighborhood HOA.
Homeowners associations create and maintain the rules of the complexes, also known as CCR’s. This keeps your shared grasses green, and your homes in uniform colors, Leeping that colorful neighbor of yours from painting his home bright purple. Most all condominiums will request an annual or monthly HOA.
Before falling in love with the house that meets your budget perfectly, check and see if there are HOA’s. Or possibly even two. That city maintained lake, or public looking golf course might just be paid for by the residents of the area. While some cities and communities charge a pittance of $30 per year, some can run as high as $300-$500.00 per month.
Location, location, location: Assuming you are buying your new home as a residence for yourself, location is going to be very important. Living near a high school might seem perfect for getting that tired teen up in the morning – SO CLOSE!, but recall that most high schools have football teams, and most of those teams have home games. Are you going to be okay with the sound of the crowds cheering, or the amplified noise of the half-time band a few Friday’s of the month?
Also, will your new location be closer or further to work? An extra 5 miles each way might seem worth the luxury of your new home, but over a period of only one year that can add up to an additional $10,000.00 in gasoline costs, not to mention the added 2600 miles you place on your car. In some areas, you might have the priviledge of a toll road. Are you willing to budget another 150.00 a month in toll costs?
Private Mortgage What?: If you are not lucky enough to have the 20% down payment, don’t fret. Many lenders will still work with you via programs like FHA, based on 5% of the value of your home. But as the saying goes, you never get something for nothing. The lender needs to insure that they won’t lose their funding in the case of a foreclosure, and this is where private mortgage insurance comes into play.
PMI’s vary based on the amount you put down, but until your home has a 20% stake in it, expect to tack on a few hundred dollars more a month towards your PMI for the first five years.
Homeowners Insurance: Homeowners insurance is relatively low in comparison with the costs of a lot of the above listed. Many wil take a small deposit and bill you monthly for the remainder for six months to a year. Shop smartly for insurance. Many times the company you purchase your car insurance will create a bundle package to get both home and auto under the same umbrella.
Appliances: You’ve bought the new house, and it’s coming together quite well, but perhaps you wanted to upgrade to all stainless steel appliances. Maybe the home came without a stove, or washer-dryer or perhaps you bought a foreclosure “As-Is” and you are responsible for all new lighting fixtures. Maybe you want new dishes to go in your new perfect kitchen. Factor in the cost of your dreams if you are using credit for these purchases. Those new balances on the credit cards can triple quite quickly!
If you use a credit card with an interest free time period, really use that time to pay this down to a zero balance, or you’ll find yourself running in place getting nowhere with future payments.
Owning your first new home is a wonderful and exhilarating thing. Sadly, waking up three months down the road, gulping for air in a panic attack because the abovementioned bills are squeezing you tight, is only going to make you nostalgic for the good old renters days.
Generally speaking if you were living comfortably on your salary before the purchase, but not able to get ahead more than a few months at a time, reconsider your purchase. If you are absolute about the timing being perfect, factor in a smaller dream home, or a slightly less expensive location.
I recall thinking when I was purchasing, that this new home would only run me $100.00 more than my current rent. That’s only 25.00 a week!! I knew if I wasn’t going to jump in the pool now, it would never happen. By absolute chance I came across a very understanding and patient real estate agent, and set about to look for my dream home.
I shopped carefully with my mortgage plan in hand, oooh’d and ahhh’d and grimaced until I found that gem that spoke to me. The price was right, and in fact in the median of my price range — the location was a little further, but it held my heart. What I didn’t factor in were nearly all of the above mentioned, and soon enough I found myself in that panicked drowning state. Ultilities were much higher, I wasn’t aware that my HOA didn’t cover water, and soon found that with my new washer, water wasn’t cheap!
I do rely on the toll roads. That $100.00 increase a month that I budgeted for is closer to $650.00 a month and as imagined a few months later I was starting to feel the pinch.I’ve gotten back on my feet since then, but the learning experience was a big one.
There were some short sighted moments that instead of hanging on, I considered silently slipping away in the dead of the night and letting it be someone else’s problem. I’m glad I stuck it out, but I really would have appreciated knowing thenwhat I know now.
If your rent was 1500.00 look at payments that might be closer to 1100.00including HOA. Understand that you are responsible for fixing, and updating everything confined in those walls. Most of all remember you are going to really have to save for that rainy day now, especially if with the rain, comes a leak!