What to Consider Before Buying Your First Home
Rents are crazy high. I regularly meet with people who tell me they want to buy a house because that rent money is just going into someone else’s pocket. On the surface this seems like sound reasoning, but there are lots of things to consider in this decision.
DO YOU LIKE HOUSEHOLD CHORES?
If you buy a single family home with a yard, expect to spend most weekends doing chores:
- Cleaning gutters
And that’s just on the outside! Chores don’t have to feel burdensome, though. I like shoveling snow, for example. Being outside after a fresh snow, getting exercise, chatting with neighbors, eyelashes frosting up is enjoyable. (I realize I might be in the minority there :) ) You can pay someone to do it for you, of course; it just increases your costs.
HOME MAINTENANCE AND REPAIRS
As a homeowner, you don’t get to just call the landlord and say the hot water heater went out. You are responsible! The rule of thumb is to save 1% to 1.5% of the value of your home for home maintenance. So, for a house worth $250,000, you will want to put aside at least $210/month. You may not spend $2500 each year, but the year you have to replace the roof, you’ll be glad you did. And seriously regret it if you didn’t!
TAXES AND INSURANCE
Like maintenance and repairs, your landlord is including taxes and insurance costs in the total rent. As a homeowner, you will pay these out of pocket – either through an escrow account with your mortgage lender or directly. If taxes are $3000/year and home insurance is $1500/year that is an additional $375 per month. These costs are not fixed, like a (fixed rate) mortgage payment. You can expect them to increase some almost annually.
PRIVATE MORTGAGE INSURANCE (PMI)
PMI is not insurance for your benefit – it protects the lender in the event you stop making payments. PMI is usually tacked on if you have less than 20% down on your new home. Now, 20% of $250,000 is $50,000. Who among us has $50,000 in savings?! While there are some down payment assistance programs available, conditions apply. Most often PMI is added to the mortgage payment. The annual amount is determined by the loan-to-value ratio, or how much savings you do have to bring to the table. The important thing to remember here that that $250,000 mortgage payment is not simply the $1200 - $1300 payment, but includes all these additional expenses, increasing that payment $500 - $600, or more.
BUT DON’T BE DISCOURAGED!
There are good reasons to buy a home, despite the increased cost:
- Relatively fixed housing expense
- Freedom to decorate and change the home as you like
- Space for children, pets, stuff
- Growing equity
- Eventually the home is paid off and no more mortgage payments
Homes are long term investments. For most Americans, our homes represent the biggest percentage of our wealth. A paid home can be inherited, giving a step up to the next generation; can be a source of income in our old age; can be leveraged for other wealth-producing activities – like starting a small business. The key is to be realistic and prepared:
- Understand your lifestyle and priorities.
- Don’t buy more home than you can afford. Lenders and real estate agents have a vested interest in getting you to spend the most money on a home.
- Be sure to utilize services of non-profit agencies, like LSS Financial Counseling, to help guide you in the process.
HOMEOWNERSHIP AND THE GREATER GOOD
Homeownership benefits the larger community, too, such as:
- Stable residents, which stabilizes community institutions like schools, churches, and civic groups
- Better academic performance by school-age children
- Sources of community history – longtime residents are treasure troves of information
- Cleaner environment – homeowners are more likely to pick up litter, and not litter in the first place
- Better public safety – homeowners are more apt to report pot holes or other hazards
- More trees and flowers – homeowners tend to plant more of these, which not only beautify the community but provide food and habitat for birds, butterflies, and pollinators
- More attractive homes – homeowners care about the appearance of their home, which benefits surrounding property values
- Greater concern about all aspects of quality of life in their community
Promoting homeownership is good public policy for towns and cities for those very reasons. As housing costs – both in ownership and rental – continue to outpace incomes, we will need to look at more innovated ways to make homeownership possible.
HOMEOWNERSHIP IS NOT FOR EVERYONE
All of those benefits is not to say we all need to own a home:
- Some of us might have jobs or lifestyles that make it hard to set down roots
- Maybe we don’t want the time-consuming responsibilities (not everyone shares my love of snow shoveling or fall yard chores)
- It is not affordable
Nor should a healthy community want strictly homeowners:
- The rental market provides jobs and increased property tax revenue
- Rental units create communities of mixed generations
- Rental property enriches the diversity of the population
There are both lots of good reasons to own a home and valid reasons to not own a home. Need help knowing where you fall? Call 888.577.2227 for free homeownership counseling.
Author Mary Ellen Kaluza is a Certified Financial Counselor with LSS Financial Counseling.