Home Sweet Home
Our 15 year-old couches are torn and smell of “recycled” baby formula that lives deep in the cushions. Yes, these couches perfectly match the finger print smudged walls and stained carpets, but my wife and I decided it was time for a change. Believing (we hope) that the kids have outgrown using the furniture like a trampoline; we’ve hired an interior designer to help us update our home.
One of our goals is to display more family photos. The other day I was digging around in a box looking for pictures and came across a list my wife and I wrote over ten years ago, entitled “How to Avoid Real Estate Blunders- 2004.”
Unless you are a movie star or NBA player, it is unlikely that there are many times in your life that you spend hundreds of thousands of dollars on something. Buying a house is a big deal. While people are more transient these days, it still might only happen once or twice in a lifetime. In 2004, we had just completed our second home purchase and wrote to our future selves with the belief that we would be in this new home for a long time. We didn’t want to go twenty years, forget everything we learned and repeat the same mistakes. (Life doesn’t always work out as you planned. We ended up moving half way across the country just two years later. Luckily, we were able to use our own advice to our benefit.)
Before getting to the five “To Do’s” on our list, I wanted to discuss a few other things to keep in mind when buying a new house.
Target at least 20% as a down payment. This is often the biggest hurdle for young buyers, but it has several benefits. In some cases it may be necessary to qualify for the mortgage. Even if that is not the case, a smaller mortgage means smaller monthly mortgage payments, which has numerous benefits. Putting down 20% will also allow you to avoid paying Private Mortgage Insurance or PMI. With less than 20% down lenders see you as a greater risk. To compensate for that risk they typically charge another 0.5% to 1.0% of the mortgage balance each year for PMI.
How Much House?
If you can put down 20% lenders are going to want to see how much you can pay monthly. They look at your income versus your other financial obligations. Typically your obligations, i.e. student loans, credit card debt, car payments, real estate taxes, and the proposed mortgage payment, cannot exceed 36% of your gross salary to qualify for a mortgage.
Most of the time mortgage rates are advertised with a “point”. A point is a pre-payment of interest. You pay to lower your interest rate and monthly mortgage payment. One point on a $100,000 mortgage is $1000. You can find several calculators online to help you determine the break even period of paying up front and make a decision on whether it makes sense for you.
Mo Money, Mo Problems
You are not guaranteed to have more problems but when someone is saving for a new home I counsel them to save a lot more than just the 20% down payment. There will be closing costs associated with the purchase. These go to pay lenders and third parties for their work and can cost 2-5% of the purchase price.
You’ll also need to put some money aside for annual upkeep such as lawn, snow removal, exterminators, and electricians. The older the home, the more you should expect to spend but a rule of thumb is 1-4% of the home value annually. And, no matter how nice a house looks, you will want to do updating and add your own touches. Please remember that it doesn’t need to look like Martha Stewart’s house in the first month. Don’t forget all the Home Depot trips, either. After our first purchase, I can remember walking out with hoses, light bulbs, garbage cans, a bill for a few hundred dollars and being confused about what just happened.
Since you’re now on the hook for a mortgage and annual real estate taxes this is likely a good time to increase your emergency reserve. The target is 3 to 6 months of fixed expenses.
Get a Lawyer
In my experience, involving a lawyer in the purchase process can be a regional thing. When we lived in New York, one called the lawyer after your offer was accepted. We followed that timeline when we bought in Wisconsin only to be told that the lawyer is used to help negotiate the deal and that we should have reached out earlier. I’ve had a family buy real estate down south and they didn’t involve a lawyer at all. With these regional differences, I think it would be best to reach out early in the process and to determine how a lawyer can best help.
As I read through the list today, I realize it is probably decent advice for any big decision. However, we wrote it over ten years ago to help with real estate. What’s more, it’s not an exhaustive or earth shattering list. Rather, it’s a list of things we didn’t want to forget in the future. So, with the disclaimers out of the way, here is “How to Avoid Real Estate Blunder’s -2004”.
- Slow Down- Don’t let anyone else set your deadlines. Yes, you need to be timely in getting information to banks and realtors but everything can seem pressured. Don’t be afraid to “sleep on it.” There are plenty of houses out there and none is the “perfect” one. Our experience had been that everyone demanded you to jump whenever they called but when you need something in return, the slowdown was on. So go slow and make sure you are comfortable with how things are progressing.
- Do More Homework – It is a big decision. Do you know the neighborhood? School system? Local Politics? Do you know the marketplace? What are comparable homes selling at? You can’t ask enough questions. (Refer to Rule #1.)
- Believe in Your Product – This becomes a bigger issue when and if you need to sell. Buy something you are excited about and don’t settle. Again, there are a lot of houses out there, but only one you. Whatever gets you excited will also likely excite someone else down the road if you are selling.
- Trust Your Gut – This is always good advice. Make sure it feels right.
- Do Not Look Back – Once the deal is done, maybe take a minute (like we did) to consider what went well and what can you learn from, but don’t dwell on it. Stop looking at listings and going through the “woulda, coulda, shouldas.” The ink on the contact is dry and now you need to make this new house your home.
By the way, I wish we had created a list on how to buy couches. Furniture shopping is a pain!