Dear first time home buyer, please read this.
Purchasing a home has always been viewed as a rite of passage and a meaningful part of the American dream.
Many of us at some point in our lives have been asked…
But why don’t these same individuals give us the whole picture and the real costs associated with being a first time home buyer? Or homeowner, in general.
I have rented apartments, I have owned two homes and sold one. All of which were in some of the most expensive areas in the country – New York City, Washington DC, Fairfield County and Fairfax County. I will be the first one to say I have paid a premium to live where I have chosen to live.
I wanted to live in those cities. Living there brought me joy. Did I pay an astronomical price to rent? I did. Did I have an amazing time living in those expensive cities? I did.
Sure there was a part of me that thought, wow, paying this rent is absurd. I am just signing a check every single month and never going to see any future benefit from it other than having a roof over my head in an amazing city.
Rent. Paying someone else’s mortgage. No ownership, no real opportunity to change the home in any way. You’re living on someone else’s property.
But…it requires nothing from you aside from a single payment. One that you can anticipate and budget for. Something breaks? They fix it. Lawn needs mowing? They mow it. Sidewalk needs shoveling? They shovel it.
Your money, your time and your freedom are not attached to this property. For some, that is a beautiful thing.
But most importantly, I want to discuss the real costs associated with buying and owning a home because there needs to be a bit more awareness around the difference between your mortgage payment and actually living in & owning a home.
Many people will think that just because they have the 20% down payment and the bank has noted that they can “afford” X mortgage, that they can in fact afford that home.
There you have it, the bank said it, not me.
But the ability to afford a mortgage payment on a monthly basis should absolutely not be the only factor in deciding whether or not you should be purchasing a home.
So after you gather up every last dollar you have for that down payment….what’s next? Let’s talk about it.
Typically it is advised to put at least 20% of the home value as a down payment. The reasoning for this is because if you opt to put less than 20% down, you may have to pay PMI (Private Mortgage Insurance). PMI is an added insurance policy that protects the lender if you can’t pay your mortgage.
The cost of PMI varies based on your credit score, insurer and loan value. But you can expect the cost to be somewhere between 0.5% – 1.5% of the original loan amount, per year.
Closing costs are the costs and fees the buyer and seller pay as a result of participating in the sale and change in ownership of real estate.
Closing costs can make up anywhere between 3% – 5% of the value of your loan. So, if you have a $400,000 loan, you should expect closing costs to be anywhere between $10,000 – $20,000. This will depend on the state you live in, the loan balance, the legal advice and contractors that you choose to hire for your home closing, title fees etc.
These costs may be split between the seller and the buyer and can be negotiated. But certainly need to be considered.
What needs to be considered for your “affordability” and “should I buy this” calculation? Below is a list of expenses to factor, in ADDITION to your mortgage payment each month:
Home ownership takes time. It takes money. It can be an investment for some, but often times it is more of an expense than anything else.
This is not me trying to convince you not to buy a home. I think it is one of the most important, wonderful and exciting financial decisions of your life.
So my point is, let’s make sure that we are making the decision well informed with an understanding of the financial impact it really will have on your life. Are you ready for it? Will you still be able to live comfortably after buying it? Do you really want it? Or are you just told that you should…
Don’t get me wrong, in most circumstances I would rather be an owner vs a renter. BUT, not at the expense of my peace of mind, sense of financial security, ability to continue to spend and have fun with my money outside of my home.
Being house poor is exhausting, paralyzing and stressful so let’s make sure that you are financially prepared.
Identify the area you want to be in and value of the home that will offer the things that you want. Do not settle for something for the sake of owning a home. You will be both disappointed and left with a significant asset on your hands that you don’t love.
This is not a post to discourage you from home ownership. I love owning a home. I also loved renting.
So I cannot join in in the argument that everyone should own. That renting is throwing money away. Because it is just simply, not that simple.
Some people are in unstable relationships, living in a wildly expensive city, traveling constantly for work, unhappy in their careers, have significant debt or frankly just don’t want the responsibility of owning a home.
And for what it’s worth, I am just over here telling you that it’s OK to rent.
But if you are a first time home buyer, you want to buy or are looking to buy, make sure you are factoring in all of the costs before jumping into one of the biggest financial decisions of your life.
If you are renting, please make it a priority to invest in your 401ks, retirement accounts or other investments accounts. It will be important to direct some of your money towards something you own with the opportunity for appreciation and growth. Investing is your opportunity.
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