You simply cannot stand one more day of the annoying parking lot shuffle or next door's surround-sound audio system. Your mind sketches elegant copper-and-shingle trim on your dream home across town, the one with a spacious two-car garage. The question you face seems as thick and dense as the mattress you contemplate moving:
Do you leap beyond the lease and mortgage yourself into property ownership?
Forget romantic notions of holiday entertaining or visions of frost-free windshields. Buying property carries with it distinct responsibilities and costs, and it may or may not be the best option for you right now. Don't even think about attending that dream house open house until you can answer the following three questions in calculated, objective detail.
1. Do You Have Timing And Time?
Financial success is often a matter of timing, and buying real estate is no different. Markets respond to demand. Young professionals are flocking to high-growth areas in search of jobs. Rents can escalate, but single-family home prices can, too. Realty pendulums can swing between a buyer's market and a seller's or renter's market even by neighborhood.
Property ownership entails hefty initial investments as well as a slew of ongoing expenses. Worth of investment depends on a property holding and hopefully appreciating value to offset expenditures. Financial consultants often cite the 5-year rule because the loan holder always exacts its interest first; in the first 5 years, mortgage payments are primarily interest and fees for insurance and tax escrow, with little reduction on principal owed.
2. Can You Afford The Mortgage Process?
Buying property entails considerably more than making a monthly mortgage payment on time. The process is a marathon of financial planning and endurance, with exit ramps gracing every mile marker. To persevere, you must:
- Maintain a spotless credit record and remain vigilant.
- Secure written documentation from a reputable financial institution prequalifying the dollar amount you should be able to borrow.
- Refine your property search to fall well within your prequalifying amount.
- Have earnest cash available to sign a contract on a property; keep in mind that if you renege on the deal, you'll forfeit that money.
- Have remaining cash to make up a down payment of 20 percent. If your loan amount is greater than 80 percent of the appraised value, your mortgage payment will increase significantly because of PMI, or private loan insurance.
- Negotiate loan terms and interest. Use an online mortgage calculator that calculates the total to satisfy a, say, $250,000 loan, and the result may surprise you. At 3.75-percent interest for a fixed-rate 30-year mortgage, the grand figure easily surpasses $400,000. Quarter percents matter, and so do the interest rate threshold increases on adjustable-rate mortgages.
- Determine if you can afford the property taxes. Tax structures vary. Being within city or town limits or even certain neighborhoods may cost more, and choosing property within commercial zones usually pushes tax fees even further.
- Have cash available for closing costs, which can range from 2 to 7 percent of your mortgage. They'll usually include 1 full year's taxes and 1 year's homeowners insurance paid in advance in addition to other legal and bank fees.
- Pay out of pocket for a home inspection and appraisal, which can each cost between $350 to $600.
- Pay out of pocket for utility hookup fees, including electric, gas, water, sewer and service for electronic devices.
3. Can You Afford Life After A Mortgage?
Your hand will be numb from signing and initialing, but you'll own the keys to your castle. Some expenses you may have anticipated while others may come as a surprise.
Is a friend with a pickup truck sufficient, or will you need to hire professional movers? A local move will cost less than a long-distance haul, but even a budget rental truck comes with costs, including fuel.
You'll no longer have a landlord to call when the hot water heater tanks or the air conditioner rebels during a sweltering, 100-degree month. Even with a home warranty, you'll still have to pay a contractor the warranty's mandatory service fee – usually around $75 – and hope that the repair is covered. Some retrofits, updates, construction and materials like Freon usually aren't covered. If the air-conditioner dies, even with a warranty, you may still face a bill for several thousand dollars.
Deductibles & Coverage
You must maintain homeowners insurance, but you'll still have a deductible, often a mandatory $1,000. You need to check every detail of coverage. The most basic policy may not be sufficient for climate conditions or replacement values. Even though it may increase your payment, you may need to adjust values or add liability coverage.
Each utility usually charges a hookup fee that you may have to pay in advance or that will be added to your first bill. If you were used to renting with utilities included or had just a small efficiency, house-sized bills can prove an eye-opener, especially when temperatures shoot over 90 for months or 20s force you to top an oil tank while oil prices climb.
Your loan holder most likely will collect and pay property taxes through your escrow account. If the property is a double lot, be sure you lender receives and pays both bills. Pay close attention, too, to due dates, as many areas offer discounts for early payment. If you pay your own property taxes, you will have to know the figures, save the funds and disburse the money on time.
Homeowners Associations & Other Annual Fees
If you buy in a planned neighborhood with beautiful landscaping, walkable sidewalks, a community pool, tennis courts and other amenities, count on annual homeowner's association dues of $500 and up. If you live in the South, your lender may require annual termite coverage inspections – about another $150.
You may be responsible for maintaining not only the house or building but also the property it occupies. In addition to caring for your home's appearance and functionality, you also may have a yard that you'll have to mow, treat and possibly water. You may have large trees, long borders of hedges and shrubs and other landscaping. You'll either have to purchase equipment to do the maintenance yourself or hire a service to do it for you. Quality lawn tractors start at about $1,500 while lawn services typically charge $150 a month and up.
A Place To Sit
Hopefully, you'll still have some money left for food, your car expenses, student loans, an occasional new pair of jeans or a night at the ballpark or movies. After all, you were only supposed to spend 28 percent of your gross income on a mortgage.
You may have to forego the widescreen television for a few months or repair the car – again. Depending on your dreams and aspirations, however, a few sacrifices in exchange for a place to call home may be worth it.
On the other hand, if the thought of all those bills crowding a long letter holder puts you in a financial cold-sweat panic, maybe you're better off giving your landlord a call about that noisy neighbor and asking for assigned parking while you're at it.