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Step 1 Deciding to by a Home |
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1. Are You Ready to Buy? |
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Do You Know What You Want?
Whether you are a first-time homebuyer or entering the marketplace as a repeat buyer, you need to ask why you want to buy. Are you planning to move to a new community due to a lifestyle change or is buying an option and not a requirement? What would you like in terms of real estate that you do not now have? Do you have a purchasing timeframe?
Whatever your answers, the more you know about the real estate marketplace, the more likely you are to effectively define your goals. As an interesting exercise, it can be worthwhile to look at the questions above and to then discuss them in detail when meeting with an Easy Living® Real Estate Professional.
Do You Have The Money?
Homes and financing are closely intertwined. (Financing is the difference between the purchase price and the down payment, commonly referred to as debt or the mortgage.) The good news is that over the years new and innovative loan programs have evolved which require a 5 percent down payment or less. In fact, a number of programs now allow purchasers to buy real estate with nothing down.
In addition to a down payment, purchasers also need cash for closing costs (the final costs associated with closing the loan). Several newly emerging loan programs not only allow the purchase of a home with no money down, but also underwrite closing costs.
Is Your Financial House in Order?
Those great loans with little or nothing down are not available to everyone: You need good credit. For at least one year prior to purchasing a home, you should assure that every credit card bill, rent check, car payment and other debt is paid in full and on time.
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2. Is Buying the Right Decision? |
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Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now's the time for you to buy a house consider the advantages of buying and whether they apply to you.
Facts about Homeownership
Homeownership can be a good investment opportunity. A house offers leverage and the possibility for appreciation in value. And, you can use this investment while it's working for you!
You can't afford to overlook the tax breaks of homeownership. Since mortgage interest and property taxes are tax deductible, homeownership can save you money each year.
Young people aren't priced out of the market. Figures from the National Association of Realtors put the average age of first-time buyers at 32 years old. Ask your Easy Living® Real Estate Professional about the number and variety of financing options available.
Renting doesn't protect you against rising prices. Rental units are just as susceptible as homes to increases in taxes, insurance, utilities and other costs. Landlords will pass along these increases to the tenants.
The waiting game is a losing game. Don't put off buying a home waiting for prices to come down. For example, from 1984 to 1994, the median price of existing homes increased from $89,400 to $145,400 -- a total increase of 61 percent.
Owning v. Renting
Here's a guideline that may change the way you view your seemingly cheap monthly rent. In order for you to see how expensive a home you could afford to buy while having the same approximate monthly cost as your current rent, simply do the following calculation:
Take your monthly rent, multiply by 200 = purchase price of home
Example: $ 750 x 200 = $150,000
So, in the preceding example, if you were paying rent of $750 per month, you would pay approximately the same amount per month to own a $150,000 home (factoring in tax savings). Now your monthly rent doesn't sound quite so cheap compared to the cost of buying a home, does it?
Move or Improve?
When is it time to move and when is it time to remodel? It's largely a question of doing the math. But the decision also depends upon your unique situation at a given point in your life.
Experts generally agree that it's cheaper to renovate your current home than it is to move to another resale house in the same neighborhood.
When you add up the commissions and other costs to sell your old home and buy the new one; the cost of a new mortgage, including escrow costs; and the cost of the physical move; unless you plan to tear down your old home and rebuild it from the foundation up, improving is much cheaper than moving.
It's not a good idea to make major improvements in your current home if there's a good chance you'll move within or out of town in the next few years, unless you are willing to gamble the cost vs. return will be in your favor when the time comes to move.
Trading Down
One day you suddenly come to the realization that you've got more space than you really need. If you're like most near or actual retirees, these feelings may also accompany the realization that you don't have as much money to live on during your retirement as you'd like. Don't despair! Now may be the time for you to trade down -- sell your current house and either buy a less expensive home or become a renter.
Trading Up
Before you set out to trade in your current house for a "better" one, you need to take a good look at your overall budget and determine how much more, if any, of your monthly spending can go toward increased housing costs.
How do you figure out where all your money goes each month? Get out your checkbook register, credit card statements, paycheck stub, most recent year's tax return, and anything else that documents where you've been spending your money over the past six to twelve months. You may also need to do some tracking or estimating of cash purchases that don't leave a paper trail. Estimating your housing budget.
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3. Costs of Ownership |
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Taxes
When you buy and own a home, your local government (typically through what is called a County Tax Collector's office) sends you an annual or semi-annual, lump-sum bill for property taxes. Receiving this bill and paying it are never much fun because most communities bill you just once or twice per year.
Property taxes are typically based on the value of a property. Although an average property tax rate is about 1.5 percent of the purchase price of the property per year, you should understand what the exact rate is in your area. To find out the property tax rate in the area where you plan to purchase your new home, simply call the local tax collector, assessor, or other taxing authority. Ask what the property tax rate is and what additional fees and assessments may apply.
Don't base your property tax estimate on the amount that the seller of the home you're interested in buying is currently paying or on the amount you're paying on your present house. The current owner's taxes may very well be based upon an outdated and much lower property valuation. Real estate listings should contain information as to what the current property owner is paying in taxes. Your property taxes (if you buy the home) may be reassessed based upon the price you paid for the property.
If you make a small down payment (typically defined as less than 20 percent of the purchase price), many lenders insist upon property tax and insurance impound/escrow accounts. These accounts require you to pay your property taxes and insurance to the lender each month along with your mortgage payment and the lender takes the responsibility of paying the taxes.
Maintenance
As a homeowner, you must make your mortgage and property tax payments. If you don't, you'll eventually lose your home. Homes also require maintenance over the years. You must do some kinds of maintenance (repairs, for example) at a certain time. Painting and other elective improvements can take place at your discretion. Maintenance is difficult to budget for. You never know precisely when you may need to fix an electrical problem, patch a leaking roof, or replace the washer and dryer -- until the problem rears its ugly head.
As a rule of thumb, expect to spend about 1 percent of the purchase price of your home each year on maintenance (use 1.25 percent of the purchase price for older and more run-down properties). Although some years you may spend less, other years you may spend more. When your home's roof goes, for example, replacing it may cost you several years' worth of your budgeted maintenance expenses.
In addition to necessary maintenance, you should also be aware of what you may spend on nonessential home improvements.
Homeowner's Insurance
If you buy a more expensive home, your homeowner's insurance premiums will probably increase. In the absence of a specific quote for a property you're interested in buying, you can estimate that your homeowner's insurance costs will increase in proportion to the increased size (square footage) of your home. Because land isn't insured, ignore the extra land that may come with your next home.
Utilities
Until you have a specific home in mind to buy, you can't request hard numbers on utility usage. In the interim, make some educated estimates. For example, if you're planning on moving into a larger home in your area with, say, 30 percent more square footage, you can estimate that your heating and electric bills will increase by about 30 percent. However, if you're moving from an old, energy-inefficient home into a newer and more efficient one, the new home may not cost you more in utilities even if it's a bit larger.
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Benefits of Ownership |
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Over the many years that you are likely to own it, your home should become an important part of your financial net worth -- that is, the difference between your assets (financial things of value that you own such as bank accounts, retirement accounts, stocks, bonds, mutual funds, and so on) and your liabilities (debts). Why? Because homes generally increase in value over the decades while you're paying down your loan (mortgage debt) used to buy the home.
Pride of Ownership
Even if you're one of those rare people who owns a home but doesn't see much appreciation (increase in the home's value) over the decades of your adult ownership, you will benefit from the monthly forced savings that results from paying down the remaining balance due on your mortgage. Retirees will tell you that one financial joy of retirement is owning a home free and clear of a mortgage.
Home Equity
All that home equity (which is the difference between the market value of a home and the outstanding loan on the home) can help your personal and financial situation in a number of ways. If, like most people, you hope to someday retire, but (also like most people) saving doesn't come easily, your home's equity can help supplement your other sources of retirement income. How can you tap into your home's equity?
Trading Down
Some people choose to trade down -- that is, to move to a less costly home in retirement. Sell your home for $250,000, replace it with one costing $150,000, and you've freed up $100,000. Subject to certain requirements, you can sell your home and realize up to $250,000 in tax-free profits if you're single; $500,000 if married.
Loans
Another way to tap your home's equity is through borrowing. Your home's equity may be an easily tapped and low-cost source of cash (the interest you pay is generally tax-deductible).
Reverse Mortgage
Some retirees also consider what's called a reverse mortgage. Under this arrangement, the lender sends you a monthly check you can spend however you want. Meanwhile, a debt balance (that will be paid off when the property is finally sold) is built up against the property.
No More Landlords
A final (and not inconsequential) benefit of owning your own home is that you don't have to subject yourself to the whims of a landlord.
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Step 1 Deciding to buy a Home
Step 2 Mortgage and finance