blog

Looking to buy your first home? Ask yourself 5 key questions first.

 

Cut your spending by $6,000 without giving up the fun and without a complicated budget.

Break the paycheck-to-paycheck cycle, find the money to pay back your loans and finally build your savings.

by Rob Bertman, CFA, CFP® in Home buying
March 28, 2016

shutterstock_151413953

It can feel empowering to be in control of your living situation.

You can decide how to make it your own by putting your personal touches on it. No one is going to raise your rent or kick you out even when you pay on time and take care of the place. There’s no one to answer to, except a partner or spouse of course.  Or maybe you just want more space to spread out.

This all sounds great, right?

To feel truly at ease when buying a home, think about it like starting your own business.  It may be worth it, but it’s a whole different ball game.

Here are the positives of home ownership:

  • You can make things exactly how you want it. You make all the decisions in terms of décor, what to update, if you want a pet, and how to make it feel like home.
  • There’s no landlord to kick you out or raise your rent on you.
  • If you “buy right”, you get the financial upside.

And the negatives of home ownership:

  • You assume all the risk so if something goes wrong, it’s up to you to get it fixed with your time or money. Sometimes, it can feel like all you’re doing is putting out fires.
  • It becomes your largest expense and largest source of debt.

There’s a lot at stake financially and with your lifestyle, so it only makes sense to approach it like you were starting your own business.  Take the time to explore and plan it out.

 

5 key questions to ask yourself:

  1. Why do you want to own a home vs renting? Get clear on what you want.
  • The most important thing here is to determine YOUR motivation. This isn’t thinking about other people, their advice or their circumstances. This is all about YOU, so make a list of the things you really want out of your living situation.
  • Is there anything you can’t do while renting that you could do if you owned your own place?

 

  1. How well do you know the market and my options? Do the research.
  • Sometimes we think we know what we want, but our perspectives can change after looking at the options. Don’t rely on the pictures on the web. They can be misleading. Get out there and start going to open houses.
  • Location, location, location is totally true. Picking the area to buy. My father-in-law taught me this lesson and saved me from making a bad decision.
    » Drive around your target neighborhoods and their surrounding shopping areas, restaurants, etc. Do you have what you need? Grocery store, restaurants, other convenient amenities?  Is it the pace of life you’re looking for?
    » What does your commute to work look like from that neighborhood? Give it a test drive.
    » What about the schools? Even if you don’t have kids yet, do a little research here.
  • Remember that you’re not going to get everything you want, but at least you have a better understanding of what is most important to you and what trade offs you’re willing to make.

 

  1. Do I have the time to own?
  • When you own a house, you can’t just call the landlord to take care of an issue while you are at work. Do you, your partner, or a local family member have the flexibility to be available when work needs to be done?  Even if you’re handy, you still need to make the time to get things done.
  • Are you willing to prioritize your time towards buying a home right now? The searching process takes some time.  If you go under contract to buy, there are all sorts of things that will need to get done (inspections, mortgage approval process, negotiations, etc.).
  • How long do you plan to stay in the city you’re in? If you are confident that you’ll be leaving the city altogether in the next 5 years, it may make sense to keep renting.

 

  1. Do I have the money to do it? Now that you’ve evaluated if buying a home is really right for you in theory, it’s time to talk finances.
  • The #1 major mistake that people make (and it’s a monster one), is thinking that if they can afford the down payment and the monthly mortgage payment, that they can afford a house. This is absolutely NOT TRUE!
    Saving for the down payment and having enough monthly income to cover the mortgage payment is simply not enough.  You may need another $10,000 of upfront savings dedicated to this, and monthly costs can go well above your mortgage payment to maintain the house.
      I put together a spreadsheet that will help you get a better estimate of how your housing costs will change.

You can download it here

    .
  • Upfront costs: The down payment is not the only major upfront one. Rarely if ever have I heard of someone buying a place and leaving everything as is. Most make changes as soon as they move in to make it feel like home to them. Also, there are moving expenses too.
    Depending on the size of the house and what you plan to do, you may need an extra $10,000 above your down payment to get it done. I’ve seen much higher and rarely much lower. No joke.
    The best way to estimate it is to take a pad and paper as you look through the house, and go room by room.  Make note of things you’d like to do like paint, buy an extra TV, get new furniture, buy new light fixtures, etc.
    You can make it all work if you spread it out. Just know that there are major changes you’ll probably want to make to your new house either right away or over time.
  • Ongoing expenses: A key misunderstanding people make is that if their mortgage payment will be close to what they are paying in rent, that they can afford to own a house.
    Regular upkeep and one-time maintenance items may account for an extra 25-50% per year of your mortgage payment.  That means that if your mortgage payment is $1,000 per month, you may need an extra $250-$500 per month on top of that to pay the other expenses.
    It doesn’t always come monthly. It could be something that happens once a quarter, once a year, or something major every 2 years. Think about it like car maintenance.  There you have oil changes, tires, car washes, new bulbs, and the dreaded check engine light issues.
  • Now that you understand the possibility that you may need an extra $10,000 above your down payment and 50% more than your monthly mortgage payment for other household items, it’s time to figure out if you can make it work?
  • Where is your money going right now:
    » How much of your money is going to rent and other things that support your living environment?
    » Do you have extra savings you’d like to put toward the house?
    » What areas of spending are you willing to cut back on to support buying a house?
    » Do you have any other major expenses coming up for travel or life events?
  • If the numbers aren’t working out for you, there are some other options that might make it more economical to own:
    » Do I have a spouse or partner that will contribute financially for the long-term?
    » Could I rent part of it out to my friends?
    » How handy am I?

 

5. Have I talked to anyone that owns a home?

  • Aim to talk to at least 3 trusted friends or family members and ask them about their experience owning a home.
  • Ask them to be honest and get their pros and cons.

 

Now you know why you want to own, where you want to live, the time it will take, the money it will take, and have heard the perspectives of others who have done it.

The only question left is one that only you can answer, “Should I do it?”

Whether the answer is yes, no, or no for now, remember that this is a major life decision.  Don’t take it lightly.  Being strategic about it will help you the best decision for you.

All the best,

Rob Bertman, CFA, CFP®
Founder & CEO
Money With Impact
www.moneywithimpact.com

Homebuying quote1

 

Cut your spending by $6,000 without giving up the fun and without a complicated budget.

Break the paycheck-to-paycheck cycle, find the money to pay back your loans and finally build your savings.