5 factors to consider before making a home purchase
Elizabeth Perry, Portfolio Operations Manager
For most individuals, a house is the largest purchase of your entire life. Do your homework ahead of time to avoid having your new purchase turn into a money pit. For today’s StreetSmarts here are five things to consider if you are in the market for a home purchase.
1. Figure out your budget.
Set a realistic price range and STICK TO IT. Look for homes below the maximum amount you would like to spend to allow for some wiggle room in a competitive market such as this one, and don’t overbid for fear of losing out. This can cause problems down the line with appraisal, taxes, mortgage and reselling the house. Also, don’t plan on dipping into your emergency fund – that is there for unplanned expenses, and a house purchase should be anything but.
- Length of tenancy
It’s important to consider longevity when you think about location and home size. And if you yourself don’t plan to live there for long, think about how rentable it is. If longevity isn’t very viable, you might consider renting for the perks of flexibility and not having to throw away money to things like closing costs that you won’t make up for in appreciation unless you own the home for a while.
- Lay the groundwork and get pre-approved for a mortgage
Shop around for loans by requesting estimates for the same type of mortgage from multiple lenders to compare costs, interest rates and possible origination fees. Avoid major life changes while shopping for a mortgage such as a job change, divorce, accumulating more debt, starting your own business, opening a new credit card, or buying a new car. Any of these changes could significantly impact your credit and loan approval.
Rates are low right now, and 15-year mortgages usually have lower rates than 30-year mortgages, so it is tempting to consider a 15-year mortgage to incur less interest. Your own feelings and beliefs about debt matter a lot, but if we put our investment caps on for a minute, it does not always make sense to mortgage for 15 years if you would otherwise be very disciplined about investing that cash flow into the stock market. I won’t get into the math right now, but the high-level way to think about it is to compare what you’ll pay in mortgage and interest, and therefore own as equity in your home, in a 15-year scenario if all your money was going towards that, with what you’d pay in mortgage and interest, and therefore own as equity in your home, in a 30-year scenario. If you go with a 30-year mortgage and take the additional leftover funds that would be going towards monthly payments in the 15-year mortgage scenario and invested them in the stock market, your capital has the potential to grow more. For instance, the long-term average appreciation in Rochester home prices is 2% per year, while the stock market has averaged approximately 10% per year.
- Extra costs can add up
There are several expenses tacked on to a home purchase that are not included in the house listing. Property insurance, title insurance, legal fees, home inspections, and moving costs, to name some, average between 1.5-4% of the house purchase price. To put it into perspective, if you were to buy a $250k home, and assume that the extra costs are 4% of the home price, you will need an additional $10,000 to cover these extra costs. If you do not account for these additional expenses, then you could make the mistake of assuming you can afford a pricier home.
- Get a home inspection
It has become commonplace to hear of individuals willing to waive inspection while making offers on a house in hopes that this will help win the bidding war. Home inspections are necessary to make an informed decision. Issues that require fixing should not be taken lightly. Even if the sellers promise repairs or renovations, nothing is certain unless the conditions and qualifiers are in writing.
The process of looking for a home can be stressful and overwhelming, to say the least, but if you adequately inform and prepare yourself, common mistakes can be easily avoided. Thanks for tuning into Street$marts today! I hope this helps you in making informed decisions while house hunting.
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