Buying Your First Home

Home ownership is considered a part of the “American Dream” to many. It is a sense of security, accomplishment, and your very own place to call home. With all of these benefits comes major responsibility that you should consider before you begin the process of looking for your first home. Other than retirement and college education, buying a home may be the largest purchase and financial goal of your life. Pay attention to your budget, goals, and personal needs - and resist the urge to keep up with your friends.

How Much Can You Afford?

You want to first calculate how much of a home you personally can afford to purchase. As I have mentioned before, you want to keep your mortgage payment to 25-30% of your monthly budget. This allows you to make room for retirement savings, vacations, and unexpected emergency savings.

Many banks and other financial institutions will allow you to borrow up to 40-50% of your monthly budget. This will only put extra strain on your cash flow when it comes time to focus on other financial goals.

Using a calculator like Zillow’s Affordability Calculator will help show you how much you can afford to spend on a home purchase.

How Much Of A Down Payment?

Saving at least 20% of your home purchase price is highly recommended. This will allow you two things - no private mortgage insurance and a lower monthly mortgage payment. Banks may allow you to purchase a home with as little as 3.5% for a down payment, which will only put extra strain on your monthly expenses.

By taking the time to diligently save up a 20% down payment, you will have created great habits to allow you to continue to save for the next big financial goal.

Miscellaneous Expenses

When you rent your home, you don’t have to deal with all of the miscellaneous expenses that homeowners do. The general rule of thumb is that you can expect to spend 1-2% of the home’s value on general repairs each year. This is above and beyond any major repairs that may need to take place right after moving in (think new roof, heating and air conditioning units, kitchen appliances, etc.).

You will want to have an extra savings account for immediate home repairs in addition to your home down payment. The exact amount needed will vary greatly, depending on the quality of home you are buying and how recently major updates have been made.

Take Your Time

Purchasing your first home is a major decision, and it pays to take your time. You will want to make sure you are comfortable with the neighborhood you are purchasing in, even down to the specific street.

When you are taking a tour of your potential new home, take the time to walk around the block to make sure you are comfortable with the surroundings. Be sure to do this in both daytime and nighttime, as the neighborhood will likely be much quieter during the day when everyone is at work.

Finally, are you unsure if you will be living in this area for the foreseeable future? If you are planning on moving within the next five years, you should consider continuing to rent instead. When it comes time to sell your home, closing costs can easily range from 10-15% of the home’s value. It will take approximately five years of mortgage payments and home appreciation just to break even on this cost.

 

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