10 Financial Considerations for Purchasing a Home

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Real Estate Image Gallery Knowing the financial factors involved in buying a house is crucial. Here are some things to keep in mind.
©iStockphoto.com/Jay Spooner

Although owning a home has traditionally been seen as a symbol of success and the American Dream, its appeal has waned in recent years. Some people are being advised to steer clear of homeownership, while others are being told that now is the perfect time to buy [sources: Kiviat, Tully]. So how do you decide whether buying a home is right for you?

Ask yourself whether owning a home is your personal dream or simply an idea of the American Dream before considering whether you can afford it. Knowing what you want now and in the future is a crucial step in understanding the financial and lifestyle commitment that homeownership entails. Whether you decide to move forward with excitement or delay the purchase for a few more years, it’s never too early to review all of the associated expenses.

10: Budgeting (Be Realistic)

If you ask friends and family who have gone through the home-buying process, they will likely tell you that it cost more than they expected. Therefore, it’s better to overestimate your costs. Avoid using phrases such as “I can afford between X and Y” because the numbers tend to creep up until the final figures are beyond your budget. During meetings with lenders, you might hear phrases like “you should expect to pay” or “your monthly mortgage will be about.” Instead of using vague terms, insist on concrete numbers.

A good starting point is to determine a realistic debt-to-income ratio. This will give you a clearer understanding of what you can afford to spend on housing without being forced to eat peanut butter and jelly sandwiches for the next decade or more. You can find several online calculators and forms that can help you calculate your numbers based on your inputs.

Income and Debt

Debt-to-income ratio (DTI) is a percentage calculated by dividing your fixed monthly expenses by your gross monthly income. A healthy DTI is estimated to be between 10 and 20 percent, or even 30 percent, while those nearing 36 percent or higher are at risk of not qualifying for home financing [sources: Detweiler; CNNMoney].

9: Applications and Closing Costs


Purchasing a home comes with costs such as mortgage applications and closing costs.
©iStockphoto.com/pederk

As with any purchase or sale, there are costs associated with buying a home. Some of the services and filings that you can expect to pay for include the following:

When applying for a mortgage, be prepared to pay an application fee which can cost several hundred dollars. In addition, a home inspection is necessary to identify any issues with the property before purchase and can cost several hundred dollars or more. Closing costs, including deeds, titles, land transfers, and legal fees, can add up and typically run about 2 to 3 percent of the cost of the house. Unexpected charges and fees may also arise during negotiations or closing, so it’s important to ask for advice and stay on top of all charges. If the house requires repairs or improvements, those costs may come out of your budget. It’s important to have a cushion of savings for accommodations and storage in case of delays. Timing the closing of a home sale with the end of a residential rental lease is also a factor to consider. Overall, being aware of all potential costs and planning ahead can prevent surprises and help ensure a successful home purchase.

7: Memberships and Utilities

When searching for a rental property, most people consider the cost of monthly utilities as a significant factor in deciding where to live. Shopping for a home is no different, except that you need to pay even closer attention to the cost of living comfortably. It can be helpful to research the average monthly utility bills of the previous homeowners or renters, especially if you compare their average consumption to yours. For example, if the previous homeowners kept the heating low to save on gas bills, you can estimate a higher cost if you prefer warmer temperatures during the cold months.

Aside from utilities, there are other fees to consider. If your new home is part of a homeowners association (HOA) or has condo dues for lawn care, maintenance, and other upkeep, these can add up. Your closing packet should include the exact annual cost of these fees, but talking to potential neighbors to determine how often the HOA dues have increased or what other charges you could expect to incur can be helpful in budgeting.

Tracking your expenses can also help you reach your home-buying savings goals. If you don’t have a budget, there are websites that offer worksheets and tools to help you track your monthly expenses, from utilities to takeout to interest charges:

  • Mint.com
  • Monthly Cash Flow Calculator
  • DaveRamsey.com

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6: Equity and Interest

Building equity is not as straightforward as it used to be. According to estimates at the close of 2010, approximately 23 percent of homes in the United States had decreased in value [source: Ellis]. Equity is the amount of money you have paid towards the value of a home by reducing the amount you owe on the loan. For instance, if you purchase a $225,000 property and after 10 years the loan (or principal balance) decreases to $100,000, then your equity is $125,000. However, in the current housing market, a home purchased for $225,000 may only be appraised at $150,000 after 10 years, resulting in negative equity despite paying towards the principal loan. This level of risk is a significant factor to consider when buying a new home, even at a more affordable selling price.

Getting a fixed-rate loan means that regardless of fluctuations in market interest rates, your mortgage payment will remain the same each month and year. However, if a home’s value significantly drops, payments become overvalued because the equity falls behind as the home value declines. An adjustable-rate mortgage (ARM), on the other hand, fluctuates with interest rates and can save homeowners money in the short term as interest rates are typically low at the beginning. However, in the long term, interest rates are only partly predictable based on economic factors and trends, and payments may increase even as a home’s value drops. Refinancing on either type of mortgage is unlikely when equity is negative, resulting in the mortgage being “upside down” or “underwater” [source: Armour]. Homeowners are then stuck with their properties until home values rise again.

5: Ensuring Your Home and Paying Taxes

Insuring your home against damage is important, but banks and lenders also require insurance to protect themselves. Homeowners insurance can be added to an existing plan, like life or auto insurance, and can be paid through a separate escrow account under your main loan. Property taxes can also be paid through this account, but underpaying may result in a lump payment later on. Banks also require private mortgage insurance if you don’t put down at least 20 percent, which can cost up to 1 percent of the loan amount annually.

4: Down Payment Choices

A 20 percent down payment may seem daunting, but not having it means paying extra fees like PMI. Piggyback loans, which involve taking out a second loan alongside the principal mortgage, are becoming less available as lenders raise requirements for buyers. Government options are available for those who can’t afford a down payment, but they are tied to mortgage insurance fees and may become less available due to proposed budget cuts. Checking your credit reports for inaccuracies and weak scores is also important before applying for a mortgage.

3: Where is the Maintenance Staff?

When there is a problem with the building, people usually call the maintenance staff to fix it. However, what happens when a problem occurs in the middle of the night, and you are unable to contact the maintenance staff? What if the repair is too expensive for you to afford? Homeowners are responsible for any repairs that are needed, whether it is a leak in the basement or a broken furnace. Homeowners insurance can cover some of these repairs, but it can also lead to increased premiums and high deductibles.

Regular maintenance can also be costly and time-consuming, which can be frustrating for homeowners. Although some people enjoy the joys of homeownership, others find it to be a burden.

2: The Housing Market Ups and Downs

Buying a home can be risky, and there is no guarantee that you will make money on the investment. The housing market can fluctuate, and you may end up with an investment that is underwater or upside down. However, if your goal is to own property and you are willing to take the risk, then owning a home may be right for you.

It is important to consider the pros and cons and weigh the risks before making a decision. It is also important to have a solid financial plan in place before taking out a large loan for a home purchase. Ultimately, the decision to buy a home should be based on your personal circumstances and goals.

1: Are You Moving?

Moving to a new home can be exciting, but it can also be expensive. However, if you are moving to a place you love and have planned for the expenses, it can be a joyous experience. On the other hand, if you are forced to move from a property you own and cannot sell, it can be a costly and stressful situation.

Americans used to buy homes with the intention of starting a family, paying off the mortgage, and living there rent-free after retirement. However, recent buyers tend to live in their homes for a shorter period of time, with plans to sell and move up or out after five to ten years. Nowadays, it’s common for people in the United States to move about 12 times in their lifetime, with nine of those moves happening after age 18. Whether it’s for a new job or to be closer to family, selling a home has become more difficult. If you’re unable to sell your home and make payments, it can lead to short-sales, foreclosures, or deed-in-lieu, which can cause long-term credit damage. While there are statistics and factors to consider when buying, owning, and selling a home, luck and chance can also play a significant role. It’s important to weigh all financial factors and decide if owning a home is worth the cost. Moving costs can also add up, especially as we accumulate more belongings. If you’re considering hiring a moving company, Relocation.com’s moving calculator can help you decide what to keep or toss.

Additional Information

Related Articles

  • Understanding Mortgages
  • Homeowners Insurance Explained
  • What You Need to Know About Home Equity Loans
  • Insight into Home Appraisals
  • The Process of Buying a House
  • Real Estate Property Taxes Overview
  • What to Look for in a Home Inspection
  • Buy or Rent: Which Option is Best for You?

More Links

  • Key Mortgage and Foreclosure Terms from Fannie Mae
  • Buying a Home Guide from U.S. Dept. of Housing and Urban Development (HUD)
  • Preparing for Homeownership with Calculators from Freddie Mac

Sources

  • Armour, Stephanie. “Retirement Affected by Underwater Mortgages.” USAToday.com. March 26, 2010. (April 1, 2011)http://www.usatoday.com/money/economy/housing/2010-03-24-1Aunderwater25_CV_N.htm
  • Clifford, Stephanie. “The True Cost of ‘Free’ Credit Reports.” The New York Times. Aug. 4, 2008. (April 1, 2011)http://www.nytimes.com/2008/08/04/business/media/04adco.html
  • CNN Money.com. “Determine Your Home Affordability.” 2011. (March 31, 2011)http://cgi.money.cnn.com/tools/houseafford/houseafford.html
  • CNN Money.com. “Money 101 Lesson 8: Getting the Money Right for Buying a Home.” 2011. (April 1, 2011)http://money.cnn.com/magazines/moneymag/money101/lesson8/index3.htm
  • Consumer Credit Counseling Services (CCCS). “Manage Your Debt with CCCS Debt-to-Income Calculator.” 2011. (March 30, 2011)http://www.cccsstl.org/debt_test/cccs_debt_to_income_calculator.asp
  • Debweiler, Gerry. “Calculate Your Debt-to-Income Ratio.” U.S. News and World Report, Money and Business: Tools. 2007. (March 30, 2011)http://www.usnews.com/usnews/biztech/tools/modebtratio.htm
  • Ellis, Blake. “Home Values Drop $1.7 Trillion in 2010.” CNNMoney.com. Dec. 9, 2010. (April 1, 2011)http://money.cnn.com/2010/12/09/real_estate/home_value/index.htm
  • Equifax Consumer Services LLC. “Find the Right Credit Product for You.” 2011. (April 1, 2011)http://www.equifax.com/credit-product-list/
  • Experian Information Solutions. “Review Your Credit Report.” 2011. (April 1, 2011)http://www.experian.com/credit-education/check-credit-report.html
  • Federal Deposit Insurance Corporation (FDIC). “Truth in Lending for Consumer Protection.” Dec. 10, 2010. (April 6, 2011)http://www.fdic.gov/regulations/laws/rules/6500-1400.html#fdic6500226.1
  • Federal Reserve Board. “Home Equity Lines of Credit: What You Need to Know.” Aug. 21, 2009. FederalReserve.gov. (April 1, 2011)http://www.federalreserve.gov/pubs/equity/equity_english.htm
  • Federal Trade Commission (FTC). “Tips for a Better Credit Report.” March 2008. (April 1, 2011)http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm
  • FHA.com. “Calculate Your FHA Mortgage Affordability.” 2011. (March 25, 2011)http://www.fha.com/calculator_afford.cfm
  • Goldfarb, Zachary A. “Proposal for 20% Down Payment on Mortgages.” The Fiscal Times. March 30, 2011. (April 2, 2011)http://www.thefiscaltimes.com/Articles/2011/03/30/WP-Regulators-Propose-20-Percent-Down-Payment-for-Mortgages.aspx
  • Independent Insurance Agents and Brokers of America (IIABA). “Prevent Homeowner Insurance Non-Renewals and Rate Increases.” IIABA.net. 2007. (April 6, 2011)http://www.iiaba.net/na/02_News/02_PressRelease/NA20070711114437?ContentPreference=NA&ActiveState=0&ContentLevel1=NEWS&ContentLevel2=NEWSPRESS&ContentLevel3=&ActiveTab=NA&StartRow=0
  • Insurance Information Institute (III). “Impact of Filing a Claim on Homeowner Insurance Premiums.” III.org. 2010. (April 6, 2011)http://www.iii.org/articles/if-i-file-claim-will-my-premium-go-up.html
  • Kiplinger’s Personal Finance Magazine. “The Importance of a Home Down Payment.” Money Central, MSN.com. 2011. (April 1, 2011)http://articles.moneycentral.msn.com/Banking/HomeFinancing/WhyYouNeedAHomeDownPayment.aspx
  • Kiviat, Barbara. “Is Homeownership Worth It?” TIME Magazine. Sept. 11, 2010. (April 1, 2011)http://www.time.com/time/business/article/0,8599,2013684-2,00.html
  • Mortgage Insurance Companies of America (MICA). “Buy a Home with a Low Down Payment.” Pueblo.gsa.gov. 2011. (April 1, 2011)http://www.pueblo.gsa.gov/cic_text/housing/low_down/low_down.htm
  • National

    The National Association of Home Builders (NAHB) has warned that a rule requiring a 20% down payment on homes would negatively impact the first-time home buyer market. Relocation.com offers a moving cost calculator to help individuals plan for their move. Shawn Tully, writing for Fortune on CNN.com, suggests that now is a good time to invest in real estate. The US Department of Housing and Urban Development (HUD) provides information and resources for those looking to buy a home, including a list of common questions from first-time homebuyers.

    FAQ

    1. What is the total cost of the home?

    The total cost of the home includes the purchase price, closing costs, property taxes, and homeowner’s insurance. It is important to factor in all of these costs when determining the affordability of a home.

    2. What is the interest rate and how will it affect my monthly payments?

    The interest rate on your mortgage will determine how much you pay in interest over the life of the loan. A higher interest rate will result in higher monthly payments and a larger total cost of the home.

    3. How much can I afford to put down?

    The amount of money you put down on a home will affect your monthly payments and the total cost of the home. It is recommended to put down at least 20% to avoid paying private mortgage insurance (PMI).

    4. What is the term of the loan?

    The term of the loan refers to the length of time over which you will make mortgage payments. A shorter term will result in higher monthly payments but a lower total cost of the home due to less interest paid.

    5. What is the condition of the home?

    The condition of the home will affect the cost of maintenance and repairs over time. It is important to have a home inspection to identify any potential issues before purchasing.

    6. What are the property taxes in the area?

    Property taxes can vary greatly depending on the location of the home. It is important to factor in the cost of property taxes when determining the affordability of a home.

    7. What is the resale value of the home?

    The resale value of the home is important to consider in case you need to sell the home in the future. Factors such as location, condition, and the local real estate market can affect the resale value.

    8. What is the cost of homeowner’s insurance?

    Homeowner’s insurance is required for most mortgages and can vary greatly depending on the location and condition of the home. It is important to factor in the cost of homeowner’s insurance when determining the affordability of a home.

    9. What is my debt-to-income ratio?

    Your debt-to-income ratio is the amount of debt you have compared to your income. Lenders use this ratio to determine how much you can afford to borrow. It is recommended to have a debt-to-income ratio of 36% or less to qualify for a mortgage.

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