If you are like most firefighters, the high-intensity situation of a house fire is preferred to the high-stress process of a home purchase.
We don't dream of gathering financial documents, arguing with our spouses over tiny details, and signing unending amounts of paperwork.
We dream of making a home purchase that brings our families happiness for years to come.
Your home is likely the biggest purchase you'll ever make. So, don't go running into it quite as quickly as we do a burning building.
Take your time and consider these issues before making entry into homeownership.
Cash Flow Issues
Your home, whether talking about mortgage, taxes, or maintenance, will always be a big part of your budget. Thoroughly analyze how much you can honestly afford. You should be creating mock budgets long before making the purchase.
And if you are subsidizing your lifestyle with excessive OT, don't include that in the analysis.
It may not always be there.
A mortgage is a long-term loan (typically 15-30 years) that allows you to purchase a home. As part of your mortgage payment, you will be making principal payments—the original cost of the house—plus interest payments.
So, if you secure a 30-year mortgage of $250,000 at 4% interest, you don't spend $250,000. At the end of the 30 years, you will have paid almost $430,000. That is a lot of interest!
But, if you purchased the same home with the same mortgage amount on a 15-year note, you would end up spending almost $100,000 less.
Yes, your payment will be much higher, but your total cost will be much lower, and you will own your home free and clear much earlier.
So, if you can swing the 15-year mortgage, please consider it.
Property taxes & Homeowner's Insurance:
You don't just get to fork over a mortgage payment every month, you'll also have to pay for property taxes and homeowners insurance.
If you weren't able to make a down payment of at least 20%, you would also have to pay mortgage insurance. Depending upon the type of loan, mortgage insurance may stop after obtaining 20% equity in your home, or you may have to refinance.
Taxes and insurance can drive your costs of homeownership up by another $4,000 to $5,000 per year.
So, continuing with the $250,000 mortgage example, you are now up to a monthly payment of about $1,600.
Brad Jones, FF Driver Engineer, and owner of Thin Red Line Real Estate Group explained, "Taxes will play a part in determining your monthly payment and there can be a wide range. I've seen them as cheap as $1,200/year and as high as $7,000/year."
Do research for your desired area and gain an understanding of what your yearly tax burden will be.
Cost of Utilities and Maintenance
The typical guesstimate for home maintenance is about 1% of the purchase price. So, if the home costs $280,000, it'd be advisable to allot about $230 per month for maintenance and upkeep.
Utilities can vary, but if you are upgrading from renting an apartment or a smaller home, you should expect your bills to increase.
The $250,000 mortgage is now costing you at least $2,000 a month.
That may be a reasonable amount for your situation. But, if you were cutting it tight with just the mortgage payment, you may want to rethink your home budget.
Brad Jones continued on to say, "There is plenty to consider when buying a home. One of the most important being price. Keep in mind that many homes are controlled by an HOA. Homeowner's Association dues can easily increase your costs by $50 to $500 per month."
As you can tell, there is much more to consider than just your mortgage payment.
A good rule of thumb is to keep your principal, interest, taxes, and insurance (PITI) less than 28% of your income.
Fixed vs. Variable rates
A fixed-rate mortgage makes planning much easier because you know what your monthly payment will be. It will charge a set rate of interest for the life of the loan.
The interest rate for a variable rate mortgage (Adjustable-Rate Mortgage) varies. Typically, it will start out lower than the market rate.
You will see terms such as 3/1, 5/1, or 10/1. This means you are locked into the initial rate for 3, 5, or 10 years. After that, rates can vary, and they often increase, leaving you with a larger mortgage payment.
This is why you see many people suggest if you don't plan on living in the home long (say less than 5 years), you should consider a variable rate mortgage.
But, if that is the case, I would consider not purchasing a home at all and just continue renting. Why?
Most of the benefit you get from homeownership is in the long run (when it's paid for). Also, a variable rate mortgage adds complexity to your financial life.
Just what you need, right? Negative.
Alphabet Soup of Mortgages
Are you active military or a veteran of the armed forces? You should consider a VA loan.
Are you moving to a rural area? You could qualify for a USDA mortgage.
Do you think you will have a hard time qualifying for a conventional loan? You might be eligible for an FHA loan.
Do you have a large down payment saved (which you should) and a solid financial foundation? You will probably qualify for a conventional loan.
As you can tell, there are many options.
It gets confusing. So, do your research.
A lower down payment signals that you are a more significant risk to lenders. That is why you end up paying for mortgage insurance and can often incur higher upfront fees.
On top of those costs, you will likely pay a higher interest rate. That significantly increases your long term cost of owning the home.
It is my suggestion not to buy a home until you can, at a minimum, make a 10% down payment (ideally 20%). The more you put down, the less your monthly payment will be, and more of the house you actually own.
Homeownership is a goal many people desire. But, what they really mean is home mortgage-ship. Because until that sucker is paid for, you don't really own it.
So put down as much as you can.
The costs don't stop at a down payment. Closing costs typically run 3 to 6 percent of the mortgage.
Closing costs are things such as appraisals, loan origination fees, processing fees, points, attorney fees, fees, fees, and more fees.
Compare lenders to find one with reasonable closing costs and consider asking the seller to contribute if the market allows.
The reason it is mentioned here in a home buying article is your insurable interest may have gone up by purchasing a home.
If you have a policy that is focused on replacing your income, you may want to increase your coverage to replace your income plus pay off the mortgage.
Home & Auto
Reach out to your auto insurer and see if there are any discounts related to bundling home and auto insurance. Buying and maintaining a home is expensive. Save money where you can.
Umbrella insurance covers liability claims above your regular home and auto policies. As your net worth grows, make sure you are adequately protected.
Purchasing a home isn't an automatic qualifier for needing an umbrella policy, but it is something to consider.
Risk factors (pools, kids, dogs, hosting parties, etc.) are specific to your situation. They should be considered, and a knowledgable decision made as to whether it is necessary.
Luckily, it is typically pretty inexpensive.
There is a myriad of things to consider when purchasing home. This list is certainly not exhaustive, but it is a start. Educate yourself on the process and calculate the actual costs involved.
As always, if you have any questions or would like any assistance in evaluating the impact a home purchase will have on your financial future, please reach out to me at firstname.lastname@example.org.
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Disclaimer: All written content on this site is for information purposes only. Opinions expressed herein are solely those of Forward Focus Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.