The number of people buying their first home is sizable and trending up, going from 30% of all sales in 2015 to 32% in 2016 according to data from the National Association of Realtors. With newbies claiming nearly a third of purchases and a whole lot of money on the line, it’s worth thinking about the basic guidelines for smart first-time house shopping. Here’s what to keep in mind.
Owning a Home Will Bring More Freedom . . . And More Emergencies
When you’re renting or living with family, it’s fun to dream about the day you can walk through the door of your future home and say, “I own this place.” When you have the freedom to decorate any way you want or even paint the ceilings fuchsia, what’s not to love?
But just because you’re the head of household doesn’t mean you’re living on Easy Street. As a new homeowner, you’ll absolutely need a full emergency fund. After all, solving all of the little problems you used to rely on your landlord or apartment management to fix—busted water heaters, broken-down air conditioners and storm-damaged windows to name a few—will be squarely on your shoulders.
So before buying a house, it’s important to hit three preliminary goals:
· Pay off all debt, including car payments, school loans and credit cards. Paycheck-to-paycheck living is no way to take on a huge new expense.
· Place three to six months’ worth of living expenses into an emergency fund. Because you can be sure kids will still get sick and tires will keep going flat, even after you move into your dream home.
· Save up at least 10-20% of the home’s price for a down payment. The more you put down, the sooner you can complete the ultimate dream of homeownership by paying off the mortgage.
A House Is a Big Investment, So Know Your Limits and Stick to Them
When you’re hunting for a dream house, it’s tempting to get caught up in curb appeal, square footage and paint colors. Sometimes a well-staged home looks so good that first-time buyers forget all about the dollars involved and yell out, “Where do I sign?”
But for most people, buying a house is the largest investment they’ll ever make. So before setting your heart on one particular neighborhood or a certain number of baths, pause and remember that this is a huge deal. Once you buy (or sign up for a mortgage), you’re responsible for the payments and the upkeep on a big and valuable resource.
The math is pretty simple. It’s essential that you find out how much house you need and how much you can afford. No mortgage payment should be more than 25% of your take-home pay. Use that number as your ceiling, and search for a payment that’s even lower if possible. By keeping the monthly payment low, you’ll prepare yourself to weather the tough times that come to all homeowners.
15 Years and Fixed Is the Only Way to Mortgage
Most people who borrow to buy a home sign up for a 30-year deal, and far too many also go for a variable interest rate. Why are those options so popular? In both cases, it’s usually because first-time buyers are thinking more about spending less money now than they are about saving more money over time.
Thirty-year mortgages do set you up with a lower monthly payment. But because of interest charges, they also wind up costing you thousands of dollars extra by the time they’re paid off. As for variable rate mortgages, they might seem affordable at first, but market variations can take you from happy homeowner to foreclosed fool in a heartbeat.
So if you must borrow to buy, pretend like a 15-year, fixed-rate mortgage is the only option available. You’ll save a ton of money, avoid a lot of heartache, and pay your home off many years earlier than you would otherwise.
And remember what we said earlier about making a healthy down payment? Don’t limit yourself in that department. There’s no law saying you can’t pay 100% down the day you buy! Sound crazy? Lots of people do it all the time. All it takes is a little planning and a whole lot of discipline.
Homeownership is a challenge. But the good news for first-time homebuyers is that it also comes with awesome privileges. Now go find your dream home!