Personal Finance

A Letter To The First Time Home Buyer

First time home buyer

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…


How could you possibly pay that much in rent, they ask. Don’t you know you’re throwing your money away, they say.


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.



Then I bought a house. And I never questioned that rent payment I used to pay again.



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.



“All I Need is the Down Payment.”
Famous Last Words of the First Time Home Buyer


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.



The Immediate Cash Outflows When Buying a Home


Down Payment

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

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.



The Costs Many First Time Home Buyers Don’t Factor In


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 Improvement

  • I have never known a single one of my friends or family members (including myself) that moved into a house without first or immediately after moving in, making changes to the home. Every single one of them made some sort of alteration or change whether that be painting, new flooring, new bathroom, etc. to make it their own. It is a natural part of nesting. Making something yours. Making it a home. But factor those immediate home improvement costs into the equation.

Real estate taxes

  • The national average for real estate property taxes is 1.07% of the appraised value of the home. This number will depend on what state you live in but you will be responsible for paying these taxes.



Utilities & Security

  • Heating & Cooling. You now own a home. You have to pay to heat and cool the home.
  • Electric. Want the lights to turn on or to charge your iphone?!
  • Water. You may have a lawn, you have to water it.
  • Security. You may have children or just want an extra layer of security around your home – another expense.
  • What about the pesky critters that linger in and around our homes? Pest control? 🙂

    You get the idea.


Different Types of Insurance


  • Homeowners insurance
  • Personal property insurance – depending on your homeowners insurance policy, you may need additional personal property insurance to protect your belongings inside the home.
  • Are you in a flood zone or a hurricane zone? If so, the lender will require you to purchase whatever relevant insurance necessary for the area you live in to protect your home.
  • Mortgage Insurance


Furnishings

  • This is probably my favorite one and most overlooked. When you move into a new home, in most circumstances, you will not have all of the furniture you need to furnish the home. You need to account for the costs that will come over the next 12-24 months to furnish the home. You can say allllll you want, that you will wait. But I will bet you, you won’t want to once you move into that home of yours!!


Repairs & Maintenance

  • Things will break, need fixing, or replacing. It’s important to have a safety net on the side to support those inevitable costs that arise from home ownership.


Landscaping/Lawn and Yard Maintenance

  • If you have a yard of any kind, you will need to maintain it. So either you can pay a service to do it for a fee. Or many times people will say, well I’ll just do it myself – that’s great! You need to pay for a lawn mower, trimming supplies, rakes, snow blowers, shovels, wheel barrows, etc.


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…


Here’s What I Want You to Ask Yourself Before Buying a Home

  1. Am I in a financially secure position within my career?

  2. Do I have plans to stay in this area for an extended period of time?

  3. What is the market place like right now?
    • For example – housing prices have soared over the last 18 months. Houses are going for tens of thousands more than asking price, inspections are being waived and homes are being sold within days, if not hours. That’s a little too hot for me right now despite the low interest rates.

  4. After I put 20% down on my home….
    • Do I still have an emergency fund saved up with at least 3-5 months worth of expenses?
    • Do I have additional spending money to furnish the home and make home improvements?

  5. What is the local housing market like in my area? Are there opportunities for growth? Is there a rental market?

  6. Do I love this home? Or am I settling just so that I can own something?


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. 


Buying a Home Is One of The Biggest Financial Choices You Will Make in Your Life

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.

A friendly reminder:

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.

Tune in to weekly blog posts every Tuesday and Thursday!

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