WEDNESDAY, FEBRUARY 21, 2018
Being a homeowner is part of the American dream, but that white picket fence
comes with a side of unexpected realities.
While buying and owning a home can be fun and rewarding, it's not all HGTV makes it out be. From hidden expenses to housekeeping demands, it involves a lot more mental and monetary effort than most originally anticipate.
According to Zillow, 52% of homeowners view their home as a financial investment and 48% view it as a reflection of who they are personally. That said, it's important to make the right decision when house shopping — and know what you're in for as you aim to get those keys in your hands.
Here's what no one tells you when it comes to buying and owning a home.
You don’t need to spend every penny of the amount you’re qualified for
Proceed with caution when exercising the mortgage rate you were approved for —while your finances may look good on paper, only you truly understand them in the context of your lifestyle. Buy the house you know you can afford, not the maximum the mortgage company thinks you can afford. It's in your best interest to leave yourself a cushion for things like unexpected costs or the possibility of a future change in your income. Otherwise, you'll be on the fast track to being house poor.
Trulia recommends limiting payments to no more than 30% of your gross monthly income, while some lenders recommend 28% for housing related costs including mortgage, insurance, and taxes.
Your furniture budget may exceed your expectations
Of course you'll need new furnishings for your new house, but if you think you can just move that four-foot bookcase or mid-century sofa from your apartment into your new Craftsman abode, think again. Depending on the house's architecture, space, and style, your furniture might not be the right size for a room or might be a completely different aesthetic altogether.
Take a hard look at what you can and can't take with you — and sell what won't work in your new home. Furnishing a new home from scratch can cost up to 25% of the home's value. When you move in, your best best is to refrain from going on a spending spree and focus on upgrading slowly.
Your monthly payment consists of more than just your mortgage
You can thank online mortgage calculators for providing you with a misleading monthly figure. As Business Insider previously reported, they only take into account the information you provide and only consider the principal payment and interest payment.
To get a more accurate picture of monthly house-related finances, you'll also need to take into consideration homeowner's insurance, property taxes, utilities, and possibly homeowner's association fees — and that's not to mention upfront closing costs, which can be up to 5% of the home purchase.
Try using Zillow Group's Realestate.com, which has an all-in monthly pricing tool that breaks down all potential monthly expenses.
School districts matter — even if you don’t have kids
Good schools are on top of every parent or prospective parent's list — but childless homebuyers may not think twice about the effect of school districts. Even if you don't have kids, buying a home in a top-notch school district will bode well in the long run come resell time. When you're ready to move on to your next home, chances are your first house will have gone up in property value and will go off the market faster thanks to new homebuyers looking for a great school for their children.
You don’t need a 20% down payment
It's a common misconception that a 20% down payment is required to purchase a home. While it's the ideal option, it's not your only one. If you can't fulfill the 20% rule, you can pay a premium for the extra risk lenders take, usually in the form of Private Mortgage Insurance (PMI), in which you pay 1 to 2% of your home's value annually in monthly payments until you have 20% equity in your home. Zillow points out in its 2017 Consumer Housing Trends Report that even with the premium, today's low mortgage rates make it so a monthly mortgage payment is still lower than a monthly rental payment in a lot of markets.
Only 37% of first-time buyers pay 20% or more as a down payment, and 29% of first-time buyers put down 3 to 9%. Overall, only 24% of buyers pay 20% of their home's purchase price upfront as a down payment, and an additional 21% put more than 20% down.
Hire a contractor, even if you don’t plan to renovate
After the home inspector looks to see what needs to be repaired, you'll want to bring in a home building/maintenance contractor to obtain a realistic estimate of what it will cost to fix those repairs. The seller's agent typically offers credits for repairs, but hold off on accepting them — they usually don't cover the actual cost. Having a quote from a contractor will help you negotiate the cost of the house or repair credits.
Don’t open — or close — any lines of credit during the home buying process
The thought of treating your new home to a leather sofa for the living room or an upgraded fridge may be enticing, but don't fall for the temptation. Resist opening a credit card for these splurges until the home buying process is complete and you're through the threshold. Opening and using a new line of credit will affect your debt-to-income ratio, which may adversely affect your home loan.
On the flip side, you also don't want to close an unused account, as it may also lower your credit score. This happens when closing a card reduces the combined available credit amount to the point where the credit utilization percentage increases for your remaining open cards.
You should really shop around for the best mortgage rate
Shopping for the best mortgage rate may seem obvious, but Zillow reveals that more than half of homebuyers only consider a single lender. Instead of using a lender recommended by someone you know like most homebuyers do, take the time now to compare what's out there. Head to different banks to see what kind of mortgage offers they're willing to pre-approve you for. A half a percentage point in your mortgage rate may not seem like a lot, but it can add up to thousands of dollars over the loan's entire lifetime.
Also allocate time to monitor mortgage rates — not many homebuyers realize these rates change daily.
Look into future building and development plans for the neighborhood
Your new home isn't the only property you'll want to cast a close eye on — make sure you also know what's going on with the surrounding property. Stop by the local planning office to see what the neighborhood's future development looks like. If a playground is in the works, this could be a selling point if you have kids — or not if you're childless and are left listening to squeaky swings all day. Likewise, train tracks being built nearby may create a noise annoyance, or a new hotel in the neighborhood could increase traffic flow over time.
Even if nothing is in the works, bear in mind that if empty land is nearby, it might end up with a house or store on it one day. Find out if the land is protected or can be bought and developed.
You’re your own landlord
Leaky faucets, creaky floorboards, a broken fence — unexpected home repairs and regular maintenance are now up to you to fix, or to at least hire someone to do it for you. Either way, you'll need a budget for that. Most homeowners will spend between 1 to 4% of a home's value annually on maintenance and repairs.
Your homeowner's insurance policy should cover the costs to replace items damaged in a natural disaster or stolen during a robbery, but for repairs and replacements resulting from general wear and tear you're out of luck — unless you get a home warranty. A warranty plan may be more cost-efficient in the long run when helping reduce maintenance costs, as it can fix the problem or credit the buyer to replace the problem.
This article was originally published on BusnessInsider.com by Hillary Hoffower
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