If you’re buying your first home, there’s a lot that you need to know about. This includes the home search process, the home purchase process, and homeownership itself.
Making sure you’re prepared ahead of time can help you make wise decisions.
The Case for Buying a House
For decades, there’s been a debate surrounding renting versus buying (and which one is better). And though there are certainly arguments to be made on both sides, there are typically more advantages associated with buying. Here are some of the reasons it’s so beneficial:
- Appreciation: Generally speaking, real estate values increase over time. Assuming you buy a decent house in a good location where there’s population growth and plenty of development, your home should appreciate at a faster rate than inflation. This makes it a good store of value and, potentially, an investment.
- Deductions: You can deduct mortgage interest and property tax from your tax return each year. This is a great benefit that can potentially lower your tax bill by thousands of dollars.
- Equity: Unlike renting, where 100 percent of your monthly check goes to pay someone else’s principal, interest, taxes, etc., homeownership allows you to gradually build equity over time. Each month, a few hundred dollars of your payment will go toward paying down the mortgage balance.
3 Things for First-Time Buyers to be Prepared For
Just because buying a house is beneficial for many folks, doesn’t mean you snap your fingers and it happens. There are dozens of small nuances associated with buying a home, and you have to be prepared for each of them. Let’s take a brief look at some of them:
1. Know How Much House You Can Actually Afford
Before you start your official home search, you’ll need to get pre-qualified for a mortgage. The lender will run some numbers based on your credit score, income, and existing debt. Each of these numbers goes into a calculator and it spits out a number. That’s how much you’re approved for.
While lenders are pretty good at estimating how much you can technically pay each month, it’s impossible for them to account for someone’s entire financial situation. The amount they think you can pay isn’t always equal to the amount you can actually pay.
They might pre-qualify you for a mortgage equalling $2,000 per month, but you know that you shouldn’t spend more than $1,700 per month. At the end of the day, you’re the one who has to live with the payment.
Run your own numbers and don’t be afraid to buy a house for less than what you’re approved for.
2. Account for Additional Expenses
Many first-time homebuyers assume that their mortgage payment is the only monthly payment they have to make, but that’s simply not the truth. When projecting your budget, make sure you account for other costs such as:
- Property taxes. Depending on where you live, property taxes can range anywhere from a couple of hundred dollars per month to several thousand. Sometimes taxes get rolled into the monthly mortgage payment and held in escrow.
- Property insurance. Your lender will require you to buy property insurance to protect you against major damage or problems. Again, this can be rolled into your monthly mortgage payment if you’d like.
- Home repairs. Maintenance and repairs are something homeowners have to think about. Make sure you’re taking this into account. As Charter Homes explains, “This shouldn’t deter you from buying a house, but it should definitely give you pause. It’s a good idea to plan at least 3.6% of the original price of the home for yearly maintenance.”
Again, these expenses shouldn’t push you away from homeownership, but you do need to account for them.
3. Pay at Least 20 Percent Down
Some lenders will require you to put just three to five percent down on a property in order to buy a house. However, it’s a good idea to buy a house where you can afford a much higher down payment. Putting down 20 percent is a good rule of thumb. This allows you to avoid paying Private Mortgage Insurance (PMI), which will cost you roughly one percent of the total loan amount per year in premium payments. (If your loan is for $300,000, this means your annual PMI will cost right around $3,000, or an extra $250 per month.)
Are You Ready?
While advantageous in most scenarios, buying a house isn’t right for every single person or household. Having said that, we recommend taking some time to evaluate whether or not it could work for you. And if you do decide to pursue homeownership, refer back to this article to prepare yourself for the journey of buying a house.
