Homeownership has long been an integral part of the American Dream, so it’s only natural for young professionals to feel the first-time homebuyers itch. Add in thin apartment walls and sinking hard-earned cash into your landlords’ pockets, and becoming a homeowner sounds pretty great.
But the dopamine rush evoked by dreams of decorating one’s own space can quickly cloud your better judgment. In reality, taking on the responsibility of a 30-year mortgage and maintaining a property is a big deal. Not everyone got a crash course in home maintenance or financial management during undergrad. Before you take the homeownership plunge, consider these three questions to determine whether you’re ready.
1. Is your savings account up to the demands of homeownership?
You’ve been stashing cash like mad ever since your upstairs neighbor’s all-night gaming sessions ruined your sleep schedule. But do you have enough to make the switch from renter to first-time homebuyers? Beyond the cost of your down payment, closing costs, and various fees, have you considered the ongoing impact on your budget?
First, make sure that you thoroughly understand the true costs of purchasing a home. This is especially important when looking into various mortgage options. Conventional mortgages have different requirements than other categories such as VA or jumbo loans. Before knowing what is available to you, you’ll need to consider your credit score and how much of a down payment you can afford.
Most first-time homebuyers consider loans from the Federal Housing Administration, which offers favorable rates and low down payments. Generally, applicants with good credit can put down as little as 3.5% toward their home purchase.
This low down payment makes buying more accessible, but it can also tempt buyers to skimp on savings. Get your homeowner’s budget right by working with real numbers rather than assuming you can afford your maximum loan approval amount. Be prepared to cover all closing costs and save for immediate fixes and projects. There are no guarantees that the seller will share these costs, so budget for them along with your down payment.
2. Are you willing to devote the time and money to maintain a home?
Renting has its drawbacks, but one major benefit is the lack of responsibility for home maintenance. If the heating element on your oven goes out, it’s on your landlord to fix it. And if the lawn needs mowing, the landscaper has it done while you’re at the office. Just as you need to budget for making the home purchase, you need to budget time and money for maintenance.
Review potential utility costs and property taxes, and estimate monthly maintenance on your target home type. Use your local utility provider’s tools to tabulate the per-square footage cost of heating and cooling. Speak with your real estate agent to learn about average mechanical and yard maintenance. Think about one-time costs like a lawn mower and trimmer as well as monthly fuel purchases. Also, consider if your home is severely outdated and likely to require extensive renovations in the future.
Next, consider how much free time you have today and whether you’re willing to use it on your home. If you love going out to brunch, running at the park, or setting out on weekend road trips, think again. Buying a home won’t eliminate those activities from your life, but it’ll demand a shift. Determine whether you’ll do required maintenance tasks yourself and adjust your free time expectations. Or calculate whether your budget allows for hiring professionals to do the work while you maintain your current lifestyle.
3. Are you planning to stay put for a while?
Mortgage loans are most commonly issued for 30-year terms. And as with most other loans, the interest is front-loaded to your amortization schedule. This means that, for the first few years of payments, you’ll devote a larger percentage toward paying interest rather than principal. If this sounds unfair, take a look at your other loans. This method is a standard practice that helps loan issuers protect their investment in your ability to repay the loan.
Understanding your loan amortization schedule can help you determine your break-even number. It’s important to know how long you’ll need to stay in the home for it to be a good investment. List the amount you plan to bring to closing, the expenses of moving and cleaning, and any initial remodeling. Add this number to your total investment. Then, use recent real estate sales data from your agent to estimate potential equity.
While you can’t know exactly when you could break even, estimating it can help you make a good choice. Generally, experts recommend first-time homebuyers stay in their homes for at least five years for it to be a good investment. If your job is likely to involve a transfer soon or your partner is itching to move closer to family, wait. But if you’re firmly rooted in your area of choice, it may be a great time to take the plunge.
Being Strategic About Your Home Search
Look at your potential home purchase as a strategic investment. Beyond serving as a landing spot after work, your home should also work for you. Homeownership is often fundamental to overall wealth accumulation, so a strategic home choice can impact your financial future.
If you choose a place that’s beautiful but expensive to maintain, you could be underwater within a year. But if you select a home that’s in good condition and likely to appreciate, it can boost your net worth. When you walk into your carefully selected home, you can relax knowing that it’s a solid investment that you can afford.