Do you dream of becoming a homeowner one day? You’re not alone. Homeownership is part of the American Dream don’t forget. But it’s not as easy to dive into as it used to be. While our parents were able to afford a house with a big yard and white picket fence for hardly any money down in their 20s, us later generations are faced with bigger barriers, and sometimes even shocking sticker prices.
That’s why it’s even more crucial now to understand all the ins and outs that go into buying a home before signing on the dotted. Remember, buying a home will probably be the biggest purchase of your life. So, before you kick off your house-hunting journey, make sure you’ve considered these 3 things first.
1. How Much Can You Really Afford?
If you think you can find out how much house you can afford through your mortgage broker or advisor at the bank — think again. They’ll definitely give you a number, but more times than not it’ll be more than you can actually afford.
Even though you may be pre-approved for a $500,000 mortgage, that doesn’t mean you should take the full amount and buy your dream home right away. Don’t fall into the same trap and become house poor like so many others. Make sure you only borrow the exact amount you really need.
To find out what that number is, start by looking at your current cost of living. Is your income barely covering all your bills, or do you have plenty of wiggle room to play with? Then, consider your income. Is your job stable? Do you expect your income to increase in the next few years? Do you have enough saved up to afford mortgage payments if you lost your job?
After reviewing both these things, it’ll become more apparent what your price range should be.
2. Why Do You Want to Buy in the First Place?
Do you want to buy a place so you can settle down and have a home base for years to come? Do you see it more as a long-term investment, so you can eventually sell it and upgrade to a bigger pad? Are you hoping to rent it out or make it into a moneymaker with AirBnB? There’s no wrong answer here, but your answer will help you determine what type of place you should buy in the first place.
For instance, if you want to see if you can earn some passive income through AirBnB, make sure to avoid any condo or townhouse corporations that don’t allow short-term leases. If you hope to live in your home for a while and start a family, look for a place big enough to grow in, not a cool loft in the city you’d need to move out of as soon as you have your first kid.
3. What Extra Expenses Will You Be on the Hook For?
Owning a home doesn’t just mean paying down your mortgage instead of paying your landlord rent. It also means you have to pay property taxes, homeowners insurance, and possible homeowners association fees. It could also include mortgage insurance if you put less than 20% down, and let’s not forget maintenance and remodeling costs.
If adding up all these extra expenses is making your heart beat fast, good! You need to be prepared for all of these expenses if you want to avoid getting into debt.
Don’t believe me? I bought my townhouse almost a year ago and it looked like everything was in perfect condition. It’s a relatively new building at only 12 years old, and compared to many of the century old rentals I’d lived in, it was brand new in my eyes.
What I didn’t know as a new homeowner is that although 12 years doesn’t sound old, it’s the age at which most big appliances stop working. It started with the washer/dryer, then the stove, and the latest items to go kaput are the furnace and air conditioner. All together, those replacements cost an extra $15,000. Ouch!
However, I made sure I did my calculations well beforehand. I set aside a good chunk of money into a special home emergency fund to pay for things just like these, without having to rely on a loan or line of credit to help out.
All that being said, I absolutely love being a homeowner. And I know a big reason why is because I did my research and was an informed homebuyer. I bought just enough house to fit my needs and my budget, and I recommend you do the same.