Buying Your First Dream Home |
| So you are considering the American Dream, home ownership. You hear from your friends that it is the greatest thing and there are so many benefits: building equity, tax deductions and the pride of your own white picket fence, but listen up if you are not careful the American Dream can quickly turn into a financial nightmare. Buying a home, especially your first, is a very emotional process, whether it is because you grew up in a comfortable home and want to replicate the lifestyle of your family or you have just always dreamed of having those great amenities. It can be a great experience to purchase a home, but we must be careful, it is easy to get distracted by the glamour of owning and forgetting all of the baggage that comes with it. So here are a few things to think of before you go any further. The Down Payment – 0 Down - No Problem….NOT SO FAST! Our recommendation is don’t buy unless you can afford to make at least a 10% down payment. Why? Simple: if you are not capable of saving for a 10% down payment, you are probably not ready for the fiduciary responsibility of owning a home. The Monthly Payment – MORTGAGE ? RENT Your mortgage payment is just the beginning of owning your house. For simplicity, let’s assume you are currently paying $1,100 a month in rent and are considering purchasing. You find this great house for $200,000, you can put 10% down, a $20,000 down-payment and qualify for a mortgage of $180,000. Using the Dynasty Partners mortgage calculator on a 30 year fixed mortgage of 6.2% it works out to be about $1,102.44 per month. Your first instinct would be: this is a silly why wouldn’t I buy a house? And you would be wrong. You should probably budget at least 40% more then your base mortgage payment to get an accurate read on your monthly costs. Things you forgot include: property taxes, homeowner’s insurance, private mortgage insurance, maintenance expenses, closing costs, and possibly association dues if it is a townhouse, condo or special neighborhood. Assuming it is a single family house with no association dues, property taxes are 2% in your area, which is $4000 a year or $333/month, homeowners insurance $25 per $100,000, or $50 per month and since you have to pay PMI insurance because you made less then a 20% down-payment it will be another $90 or so a month. Last, but definitely not least, maintenance: you can no longer call your landlord when you’re cold and the heat won’t turn on. On average, I would budget $100/month in maintenance expenses for a reasonable safety net. Add all of these costs up and you have an additional $573 per month, turning your $1,100 mortgage payment into an almost $1,700 cost of ownership. Deceptive Benefits – BUT WHAT ABOUT THE TAX SAVINGS? Let's take another look at our $1,100 monthly mortgage. The total interest payments in the first year will be about $11,100. Your tax savings assuming you are in the 20% tax bracket (20 percent of $11,100) is $2,220 or about $185 a month. This does reduce your monthly payment, but does not even cover the additional property taxes that you are now paying as an owner. Your monthly payments might be reduced to $1,490 per month, which might not seem like a lot more then your $1,100 rent payment, but for some of you it can make a large difference in your lifestyle and comfort level. All of the extra costs should be factored in when you are deciding how much home you can really afford. You might need to come down a little in price. Every $10,000 you come down in the mortgage cost will reduce your monthly payment by about $52. We still think that buying a house is the best investment a family can make, but it takes diligence to ensure that you are not overextending yourself. The Market – Everyone’s Saying It’s A BUYERS MARKET…Not Yet. It is true, we are currently facing the worst housing slump in two decades, which surprised individuals who were used to seeing extraordinary annual appreciation in their home values, but if we learned anything from the 2000 tech bubble; is that market slumps take time to recover. It was just recently that the S&P 500 stock index surpassed the levels it was in 2000. With rising inflation a scare it is likely that the fed will not lower interest rates, therefore putting continued pressure on the housing market, which signals that a turnaround won’t happen overnight. So when your realtor calls and explains the buyer’s market is due to high inventory levels, he better be signaling that sellers are willing to discount. |
Author Stedman Issen Burg