What I Would Like to Know Before Buying My First Home
Several years ago, my wife and I were in a quandary. We lived in the smallest three-room apartment you can imagine, with a small child and one more on the way. We’ve already had to get creative with having one child at home, but two? It was clear that we needed more space .
We considered a more spacious apartment, but there was not a single apartment that was even remotely priced at a reasonable price in the location we wanted. From this we began our search for a home.
To be honest, we somehow managed to stumble upon a house that was good for our needs at a fairly reasonable price. However, in hindsight, I understand that we were able to find this home through pure, pure luck. We did a lot of wrong things during the house search, move, and early days of home ownership.
If I somehow had to do it over and over again, I would make smarter decisions and take a closer look at things that I didn’t pay any attention to. But, unfortunately, I don’t have a time machine. Instead, here are 12 things I most regret not thinking or doing during the entire process of moving from apartment to house. Perhaps they will find their way to someone in the same situation in which I found myself 15 years ago.
Apartments offer more benefits than you think
It’s easy to get carried away with the potential benefits of home ownership: you can build your own equity! You don’t have a homeowner sneaking! Once you pay off your mortgage, you no longer have your monthly payment! (Well, excluding property taxes, fees, and insurance.) You can do whatever you want with the property – if you want to knock out a wall or paint a room fuchsia, go for it!
The fact is that in fact, renting an apartment offers many advantages that people usually overlook. First, you don’t need to do maintenance on the property; if anything breaks, call the landlord. If you own a home, you will either repair it yourself or call a repairman. In any case, you will have to spend money on spare parts (at least) and labor (if you get help). Renters insurance is also much cheaper than homeowner’s insurance for even the cheapest properties, and renters don’t have to pay for things like property taxes or association fees. Plus, tasks like mowing the lawn, mowing weeds, and pruning trees may not even be at your disposal – they just got taken care of.
These costs all add up and should be considered when comparing mortgages and rentals . With that in mind, spend some time on a rent-or-buy calculator like this one from the New York Times before considering buying. Check the numbers over and over again to be absolutely sure that the financial benefit you get from buying a home is greater than from renting.
A down payment of 20% is great, but not necessary.
Conventional wisdom says that potential homeowners should plan for a 20% down payment as a minimum . But that doesn’t reflect the reality of an actual home purchase: Bankrate.com reports that the average down payment in 2020 was around 12% . If so many people bet much less than 20% , where did that particular number come from?
This is due to private mortgage insurance, or PMI, which banks require from buyers who cannot make a big enough down payment. PMI protects a financial institution lending money to you if you defaulted on your mortgage, and most loans require a down payment of less than 20% . You are responsible for formalizing the PMI policy and paying premiums, which typically range from 0.5% to 1% of the total loan amount each year. For a $ 350,000 home, that would be $ 1,750- $ 3,500 per year (or $ 145-290 per month) on top of your mortgage payments. But once you pay off 20% of your mortgage, you can cancel your PMI. ( Unless you have an FHA loan, in which case you will have to refinance the non-FHA loan first .)
If PMI sounds like banks forcing people who “don’t have” enough money in advance to pay extra money over time because one day they might even have less money than they do now, well, you’re not wrong. However, like almost every part of buying a home, it’s tricky. If it’s really important for you to avoid PMI, it might be worth saving the 20% down payment. If it’s really important for you to get into your own home with a down payment that you can afford in the next year or two, PMI can do it. Each option has its pros and cons, and depending on your goals, finances, and housing prices in your area, any of them might work for you.
Location matters, as everyone says
This is what you probably already understand, but I am putting it here to emphasize again: location is very important. Wherever you decide to live, you are more likely to get from that place to the place where you work. This trip will cost both money and time, which will be repeated every day as long as you have the job.
Great if you live close to work: you can walk or bike to work, so your commuting to work is virtually nil. If you are a little further away, but live somewhere with a transportation system, you can probably take the bus or metro; you will have to pay some public transport fees, but by and large it’s still pretty cheap. But if you are in an area with no public transportation, or live so far from work that you have to drive, you will need a car and cars are expensive. AAA estimates the average cost of owning a new car at $ 9,282 per year . This includes insurance, fuel, maintenance, licensing and registration, depreciation and interest on the loan. (Average about $ 920 per year – interest on loans alone is almost 40% of the cost of ownership in 2020.) Used cars are cheaper, but even so: Oops.
In other words, buying a home in the wrong place can increase your annual travel expenses from $ 0 to over $ 9,000. So your monthly housing costs are $ 700 per month – and we’re not even talking about the time you spend every day. The commute shouldn’t be an obstacle, but it should be part of your math when deciding whether to move.
Take a closer look at your mortgage and then get pre-approved
My wife and I went shopping looking for a mortgage, but basically it was looking at a few mortgage rates announced and then quickly choosing a financial institution to work with. What we needed to do was meet with several different banks to discuss mortgage lending options and see what types of loans they are willing to pre-approve for us.
Pre-approval gives you a dollar amount that you can safely shop with without returning or getting approved. This is actually your house hunting budget and it makes the whole process much easier. It will take some time, but spend this time now: if you find a bank that lowers your interest rate by 0.25% and pre-approves your loan, it will pay off hugely. Even this small amount is worth many hours of bank meetings.
When choosing a house, be guided by the minimum
When you are on the hunt for a house, it is very easy to be overwhelmed by the larger houses with prettier decor and furnishings. They look good. They are roomy. They shine when compared to smaller houses with lower quality décor.
The point is, you pay for these prettier items – and you pay a lot . My advice? Start at the bottom and work your way up. Don’t start by looking at homes at the very top of your pre-approval. If you do it like we do, you will find that you are naturally predisposed to cheaper homes: your comparison base will be an expensive, gorgeous home that can be a financial burden on your ankle. Instead, look at the houses at the bottom first and see if they stand out for you with their needs. If you don’t find anything suitable, you can very slowly start raising your price ceiling and looking at more expensive homes.
Get 15 Years Mortgage If You Can
Over the course of a 15-year mortgage, you will end up paying the bank about a third of the interest that you would have paid over a 30-year mortgage. This is because the 15 year mortgage is not only shorter (meaning you pay more principal each month), but it also has a lower interest rate.
So why then even mortgage loans for 30 years? The reason is simple: they have lower monthly payments. While these smaller payments are more expensive in the long run, people often look at larger 15-year mortgage payments and back down, believing they can’t afford them.
If you’re dreading the monthly payments on a 15-year mortgage, choosing a 30-year for the same amount isn’t necessarily better. You should buy a home that you can actually afford, and a longer loan term will not change that. Unless you have some incredibly compelling reason to opt for a 30 year mortgage, you should get a 15 year mortgage.
Keep your debt payments at 40% of the salary you receive
This is a good rule of thumb for financial well-being: take monthly payments on existing debt and add them to the monthly payments on a 15-year mortgage. If the total amount exceeds 40% of your monthly wage for a home, you are in a very dangerous financial situation and you should seriously reconsider your decision to buy this home.
This is an example of a silly move we almost took, except that we were directly rescued from it by the loan officer of the credit union we worked with. The number one figure she worked with in determining our preliminary approval was our monthly budget, and it didn’t allow us to exceed 40% of the total debt repayment. Therefore, she pre-approved us for a loan with payments below this threshold of 40%. Without this cautious loan officer, we might be in serious disarray as we would be willing to borrow more for a larger home.
Flipping is much harder than it seems on TV
One potential way of owning a home is the idea of “flipping” the house – buying it, working on it, and then selling it for a profit. It can be profitable for sure, but you should know that it is also a huge waste of time.
Before you get down to business, think that you will spend many hours on such a project if you take on it. If the house you are flipping is also your primary residence during the process, you are adding even more problems to the equation. You can make a profit without losing your mind if you know what you are doing and have good carpenter and handyman skills. But if you miss them, things will go wrong. You risk losing a lot of time and money.
Keep a decent amount of money close at hand when you move.
In the months leading up to your move, do not invest all of your cash in down payments or closing accounts. Set aside some of these for the inevitable package of expenses you’ll find when you move.
You will find that you need a lot of things, especially those that were previously provided by your landlord: a lawn mower (or mowing service), various tools, fixtures, minor home renovation supplies, and possibly some furniture. These costs will go up, no matter how economically you try. Instead of piling up credit card debt, spend some of your savings when you first move in. You will be incredibly glad you did it.
First “ fill ” the rooms with basic furniture and then improve
If you are moving from apartment to house, some rooms may seem terribly sparse at first. It is very tempting to fill them with furniture, especially seating, and there is nothing wrong with that. Just do it wisely.
I highly recommend starting with inexpensive second-hand furniture to take up a little space and get rid of this feeling of “emptiness” as cheaply as possible. Then slowly update the environment as you see fit (and as needed). If you do it slowly, you can do it out of pocket, without the additional cost of credit card interest, and without risking your emergency fund or other savings.
Eliminate Clutter with One In, One Out Policy
Once you have acquired a few true essentials for your new home, adopt a one-to-one, policy for everything. If you are importing an item, you need to dispose of the same type of item by selling it. Apply it to books, clothing, gadgets, tools, kitchen utensils, toys, and whatever else you tend to collect.
Without such a policy, you can quickly fill up any extra space in the new location so that it is just as cluttered as the old one. You will also find yourself in a position where it will be much more difficult for you to move, rearrange things, and generally have an uncluttered home in your home. Another great advantage of such a policy is that it allows you to keep money in your pocket. You will become very selective about the things you buy, which means that overall you will spend less. When you actually spend money, it will go towards improving quality, not just mass-producing things.
Get to know all your neighbors
This is one of the most actionable tips for any new homeowner. Getting to know people in your new neighborhood, or at least everyone in a few of your own homes, is pretty easy. Just stop by if you see them outside and introduce yourself. Once you are settled, invite some of them to the barbecue if you like, or to dinner (when you can host again).
It is very helpful to establish mutually beneficial relationships with neighbors. A good neighbor is a loan library, a source of advice, a burglar alarm, a parcel retriever, an emergency nanny, and even a potential lifelong friend, so don’t be shy. This does not mean that you should immediately become best friends with everyone, but having a good relationship with your neighbors will make life much easier and more enjoyable.
My wife and I have messed up all 12 of these strategies in different ways when buying, moving, and moving into our current home. These weren’t deliberate mistakes, just mistakes we made because we didn’t know what we were doing yet. If I had to do it over and over again, I would try to do it from the beginning. Hope you can do the same.
This article was originally published on August 8, 2016. It was updated on March 31, 2021 to reflect the current Lifehacker style rules, as well as changes in the cost of mortgage insurance and the cost of vehicle ownership.