Buying a home is an exciting time, but it’s also a decision you shouldn’t take lightly. Here are a few things you may not know before you decide to buy your first home.
Buy For the Right Reasons
Some people will tell you you’re throwing your money away on rent. Some will tell you should get in while it’s a buyer’s market. Others might tell you that you’ll be sorry you didn’t buy now, because interest rates are bound to increase.
Don’t buy a house for these reasons. Buying a house is a commitment that demands your time, energy, and money. You should be willing to spend at least five years in your home and be ready to shell out more money over the years. It’s not a buy it and leave it proposition.
Pre-Approval is a Big Advantage
First-time home buyers often envision buying the perfect house. They have visions of granite countertops, stainless steel appliances, a huge yard and a short commute. The problem is that all this comes at a price and it’s usually higher than what they can afford.
Before you start looking at any homes, find out what you can comfortably afford to buy. A mortgage broker can help you collect the necessary documents, obtain a credit check, and calculate what you can afford. They’ll also arrange pre-approval on the best possible mortgage for your financial situation.
Alternatively, input your finances in this calculator and then visit your bank. Just remember, they only sell their own products and not as many, so you may not get the best possible deal.
Pre-approval shows you’re committed and ready to buy. It allows you to put an offer in on a home you like immediately which is a great advantage, especially in a tight market.
Budget for Closing Costs
Many first-time buyers are surprised to discover how many additional costs they need to pay. Closing costs vary and are negotiable, however Realtor.com suggests between 3% and 4% of the purchase price of the home is average.
Closing costs include items such as property tax, interest, appraisal fee, home inspection fee, title insurance, lender fees for processing the application, and more.
Shop for Insurance Coverage Early
Lenders require proof of homeowners insurance to secure the mortgage, so you’ll prepay for an insurance “binder.” Lenders need this binder at least a few days before closing or it could delay the process.
Contact your insurance agent at least 30 days beforehand so they can search for the best possible coverage and rates. If you’re buying a condo or townhome, you may also need to pay into the homeowners association’s master policy.
Your insurance agent will determine the amount of insurance you need based on the estimated cost to rebuild your home. Often times, the insurable amount is lower than the price of the home, because it doesn’t include the land.
Don’t be surprised if your insurance agent recommends additional coverages. Standard homeowners policies don’t cover things such as sewer backup, flooding, earthquakes and other risks. It will not cover damage caused by poor maintenance either. That’s your responsibility.
Homeowners insurance is meant for large, catastrophic losses, so take that into consideration when working with your agent to decide on a deductible amount. Your agent can help you set a deductible you can reasonably handle through savings. Avoid small claims as it can lead to higher premiums or non-renewal.
You May Need Mortgage Insurance
If you buy a home with less than 20% as a down payment, you may also need private mortgage insurance (PMI).
This isn’t the same as homeowners insurance and it isn’t intended to protect you. Instead, it’s insurance for the mortgage company as they’re lending to a riskier buyer. You can usually cancel it once you’ve reached 20% equity in your home.
Plan to Pay Ongoing Maintenance
All homes require maintenance, but older homes generally cost more. Estimate for at least $3,000 annually and remember maintenance isn’t optional.
It is a requirement of insurance and many warranties on new homes demand it. Otherwise, claims may be rejected.
Plan for Tax Increases
Taxes generally increase gradually each year, but plan for the worst. Substantial tax hikes can catch any owner off guard, but especially new homeowners on a tight budget.
Create a dedicated savings account and sock away money every month. If taxes don’t increase too much just reduce the monthly amount. It provides peace of mind and protects you no matter what happens.