You’ve been renting for years and are anxious to call a place your own. But are you prepared to take the leap into homeownership? Make sure you consider these three things before setting out on the homebuying journey.
#1 You plan to stick around.
The rule of thumb is that buying makes sense if you are planning to stay put for at least five years. Based on the historical rate of home appreciation, it takes about five years to break even on your home. There are significant costs associated with both buying and selling a home, from closing costs to real estate sales commissions to everyday maintenance and repair costs. If you aren’t prepared to put down roots for a little while, you could end up losing money in the long run.
#2 Your financial ducks are in a row.
You have a good credit score.
Most likely you will need financing to help purchase your home, and your credit score is a huge factor in the approval process. A healthy credit score – traditionally over 700 – will lower your interest rate and save you thousands of dollars over the life of your loan.
You’ve saved for a down payment.
A down payment is one of the biggest investments most people will ever make. Ideally, you will have saved 20% or more of the total cost of your home to put down on your house. Some lenders will require less than 20%, but you’ll have to pay mortgage insurance, which can add up.
You have an emergency fund.
Things happen, and when you own a house, those unexpected costs fall on you. Make sure you have three to six months of total expenses set aside. That includes your mortgage payment, plus all of your other expenses, including utilities, groceries and your phone bill.
You’ve calculated all the costs.
According to a Zillow survey, 20% of homebuyers were surprised by the cost of closing, and 38% were surprised by how much it cost to maintain their new homes. Do the math and make sure you’re prepared for closing costs, property tax, homeowners insurance and any homeowners association fees you might encounter.
#3 You know what you want, but you’re willing to compromise.
There’s a good chance you have your dream house in mind – the one in the perfect neighborhood with the big backyard and the gourmet kitchen. It’s good to know what your core requirements are, but make sure you are willing to compromise. Think of your criteria as a triangle – Price, Location and House – and then decide which two are most important. For example, if it’s most important that the house price fits in your budget and is in a particular school district, be prepared to lose the home office you wanted. On the other hand, if you can’t live without the house in the heart of the city with the wraparound porch, you may have to increase your budget. Before you start shopping, make sure you know which two sides of the triangle you will prioritize.