Insanely low mortgage interest rates — and the knowledge that they’ll eventually go up again — make a lot of people feel like it’s time to buy a house right now. And maybe it is … if you go about it the right way.
Buying a home is a major purchase (to put it mildly), and there are plenty of ways to trip up. But don’t worry — we’ve got your primer right here.
Don’t … buy a house if you’re planning to move again soon
If you’re a renter, it can be frustrating to write a rent check every month and have no home equity to show for it at the end of the year. But if you aren’t certain that you’re going to stay put for a few years, it’s probably not the right time to buy — equity or no equity. “Some people tend to buy a house knowing that they’re going to be relocating after a few years,” says LearnVest Planning Services certified financial planner Ellen Derrick. “Don’t buy property and automatically assume that you’ll be able to rent it out or sell it when you move.”
What to do: If you aren’t in an area with a strong rental market that would allow you to cover the mortgage on your home if you move elsewhere, then stick with a rental for now.
Don’t … bust your budget
Shopping for houses can make you a little giddy. Look at this one! And this one! For a little bit more, you could get granite countertops, plus an office nook! You’re dealing with such large numbers when you’re browsing real estate that it might not seem like such a huge deal to stretch another $10,000 or $15,000 to get the home you really love. But that’s not a game you want to play. “People look at the top end of their affordable monthly payment, and they don’t really think about what happens if their income goes down or they have to change jobs,” says Derrick. (If you’re wondering what percentage of your budget should go toward housing, check out the 50/20/30 Rule.)
What to do: Get pre-approved for a mortgage. Not only will this prove that you’re serious to your real estate agent and home sellers; it will also give you an idea of your upper limit. “Remember that the lender is there to make you a loan, and the more money you borrow, the better it is for them,” Derrick says. “They want you to max out. I would take the pre-approval number and cut about 20 percent off.”
Don’t … forget about added costs
Buying a home isn’t just a matter of replacing a rental payment with a mortgage payment. There are also maintenance costs, utilities (which will likely cost more) and property taxes. “People tend to forget about both property taxes and insurance when they’re thinking about how much house they can afford,” Derrick says. “The actual monthly payment could end up being well out of your price range when you figure those things in.”
What to do: Ask the homeowners about their average utility costs and property taxes, get a homeowner’s insurance quote, and budget about one percent of the home’s purchase price for annual maintenance. Then run the numbers to see if you can afford the home. (And, don’t forget about closing costs.)