Buying a home has long been a cornerstone in the foundation of the quintessential American dream but there are some very important things to consider when deciding to buy a home. There are emotional attachments to owning a home, but at the end of the day it is still an investment.
Questions you should ask yourself early in the decision process of buying a home:
What are your intentions?
How long do you plan on staying in the home, or what is the likelihood of relocating for work? Your financing options or overall decision to buy should take into consideration your answer to these questions.
What is your exit strategy?
Do you plan on selling and upgrading when making a housing change in the future, or do you plan on renting the property to a tenant?
What are your long-term plans?
Home ownership should be integrated with long-term goals such as retirement, estate planning, and tax management.
What should your home budget be?
When it comes to purchasing a home, it is important that you are aware of three financial figures and understand what they represent in your decision.
How much you qualify for should never be the beginning and end of your decision-making process when setting the budget for your home search.
What you can afford to spend on a mortgage is an even more important figure than how much the banks will qualify you for a mortgage, but it is not the best metric for deciding what is best for you.
What you should budget for your home purchase is a figure that takes several factors into consideration. These factors include desired financial ratios, how to incorporate your home into your financial plan so that it can serve multiple purposes (as an asset & dwelling), and if you can maintain liquidity needs once you finalize your purchase
General Rules & Costs to Consider
Down Payment – How much you put down on your home can greatly affect your monthly mortgage for reasons other than a smaller principal loan amount. If your down payment is less than 20% of the purchase price of the home, you will more than likely be required to pay private mortgage insurance (PMI) on your home. You can expect to PMI rates to be roughly about 1% of your loan amount. VA home loans do not carry this PMI requirement, so there are some potential savings there if this type of loan is available to you.
Total Housing Cost Ratio – You should limit your total housing expenses to 28% of your monthly income. Total housing costs include principal & interest; HOA dues; insurance; and property taxes. This ratio is often confused with debt-to-income ratio or total debt ratio which should also be considered, but the home purchase decision should begin this very important figure.
A primary residence is the largest asset in the portfolio of many people today which is why every factor regarding its purchase should be carefully considered. If you consult with a professional for advice in the process and how it potentially affects your total financial picture, you should engage someone who has your best interests at heart and is void of any conflict of interest.
Always remember what you qualify for; what you can afford; and how much you should apply for in terms of a mortgage can easily be three different numbers.
It is always wise to speak with a financial professional to assist you in incorporating your home purchase into your plan for wealth creation and wealth management. Just as every person is different, so are the scenarios involved that could affect your financial strategy.