Remember the Tom Hanks and Shelley Long movie The Money Pit? It was a humorous look at a couple who recently purchased an old but charming home that needed some serious renovation. Scouts honor, but I think my homebuying experience dwarfed the outlandish, comedic scenes in that movie.
Mrs. Harbor Crest and I decided to move to sunny South Florida, by way of New York City, in 2013. We found a beautiful New England–styled home that — cue ominous music — also needed some serious renovation.
From our exquisite market timing (mortgage rates increased a full percentage point the summer we moved) to a three-month renovation that ended up taking eighteen months after a flood (thank goodness for the then-lost property tax write-offs!), we ran into just about every problem one could expect when buying a home.
In today’s blog post, we will cover five financial tips so you can have a successful homebuying experience.
1. Set and Stick to Your Budget
Your home will likely be the largest purchase you make in your lifetime, not counting that seemingly never-ending investment in your children. While popular financial press likes to debate the merits of saving money on lattes over the course of one’s lifetime, the easiest and biggest way to bust your budget is to overspend on housing.
I’m a big proponent of building a financial plan to help guide life decisions around money. Buying a home is the quintessential case for this. Here are some questions you’ll want to address when creating your budget:
- What monthly payment can you afford?
- How will you protect your investment?
- What other issues could crop up (like my water leak) that would require a larger-than-anticipated outlay?
- Do you want to expand your family, and will this potential home support that?
These types of questions are a lot easier to answer when you have a firm handle on your current and future cash inflows, outflows, and assets.
2. Prepare Your Credit
Absent a large slug of cash sitting in the bank, you will likely take out a mortgage to fund your home purchase. To maximize your chances of getting approved and getting the best rate, consider ways to improve your credit score now.
Don’t take out new credit cards or other lines of credit leading up to your home purchase. This negatively affects your credit score. Additionally, don’t make drastic changes to your lifestyle (such as changing jobs or making large purchases) that could affect your income or assets. Banks want to know you have the cash or collateral on hand to make your mortgage payment.
Finally, look into getting a preapproval from a bank. This has a two-fold benefit: One, it will give you a second set of eyes on the size of home, and resulting mortgage payment, you can afford. Second, it expedites the buying process, since sellers and their agents know you are committed and have (tacit) bank backing.
3. Save for Down Payment
Mortgage credit has eased since the financial crisis, and there are several options to make down payments of less than 20 percent. However, these methods often require additional documentation, credit counseling, and supplementary insurance payments. These are all acceptable methods to help with a home purchase, and they indeed have opened up the opportunities for homeownership to more people.
All of that said, it’s vitally important to understand buying a home is more than just buying a new pair of shoes. Outside of mortgage REITs, there’s no such thing as passive homeownership.
What does this all have to do with down payments? Make sure you understand the commitment it takes to be a homeowner, which includes saving now to increase the equity in your home and maximize your chances of getting a good rate without making unnecessary mortgage insurance payments. Homeownership is wonderful, but it’s often a time and money sacrifice. Saving for a down payment now will instill the discipline you will need to manage your new asset.
4. Consider All Costs
A cold, hard truth of homeownership is that the sticker-shock price you pay upfront will not be your only outlay. Costs come up out of the woodwork, pun completely intended. For instance, closing costs can run 2 to 5 percent of your home’s purchase price.
Then there’s the PITI. You may know the PI from your bank — the principal and interest payments on the mortgage itself. People often forget the TI, which is tax and insurance. These will adjust year-to-year, so a level mortgage payment is actually not the same dollar amount over time. And if your home price increases in value, you may owe more in taxes in future years than you budgeted for as part of your overall mortgage payment.
Don’t forget the ongoing maintenance, either. Houses are complicated structures, and invariable something will wear out or break. It’s good to know where the closest Home Depot and Lowe’s are located. I still get gift cards to both for my birthday.
We often tell clients to build an emergency fund, typically for cases of income disruption due to job loss or injury. If you spring a leak and need to replace some drywall, you likely won’t file a claim on your homeowner’s insurance policy, requiring you to fund it out of pocket.
5. Know What You Are Buying
It’s easy to fall in love with the curb appeal of your (potential) home. Fresh gardens, green grass, and gabled windows sound like something right out of a Margaret Mitchell novel.
It’s vitally important to not judge this book by its cover (yes, pun also intended). Understand the insides of your house. When was it built? Concrete or wood-framed? How old are the air conditioners? What happens to the yard when it rains? Are you smack underneath an airplane landing zone?
You will likely be required to get both a home appraisal and home inspection. Make sure you understand the reports in detail before you sign any contracts. The home inspection, in particular, should point out all of the tiny details you may have missed during your walk-through when you were imagining the kids running down the halls.
Prepare for Your Home Purchase with Harbor Crest Wealth Advisors
After our eighteen-month renovation — during which we lived with my in-laws — we finally moved into our almost brand-new home. We’ve loved it every day since, absent a few follow-up water leaks.
It was quite the learning experience — I like to say we fast-forwarded ten years of homeownership knowledge (as well as costs) into a year and a half. Perhaps I can sell my story as a script for a remake of The Money Pit.
If you would like to hear more tips about homeownership and how to fit your purchase into your financial life, sign up for our monthly newsletter.