People ask me all the time, “Can I afford to buy a home?” If that’s you, you’ve found the right post! Of course, everyone’s details are different. But, this article will provide you with the framework needed to answer this very question.
In the world of real estate, one thing is certain… change. The market goes up! The market comes down.
Then there are interest rates, changes in Federal regulations, and much more! For anyone new to this, it can be a daunting and confusing world.
But help is available if you know where to look. Finding a trustworthy expert is perhaps the most important step in the entire process!
So, until you find yours, let me be that person for you as you get your feet wet and ultimately answer the question:
Can I afford to buy a home?
Let’s do this!
Should I even buy a home?
Before we ever start to determine if that cute Cape Cod might be worth a visit, let’s step back and tackle the integral question everyone should ask—should I even buy a home?
The answer to whether you should buy or continue to rent is, “It depends.”
That’s really helpful, right? Ok sorry, let me explain how to get a better answer.
I’m not a fan of everything that Trulia does, much of their listing data has been found to be inaccurate, but their site does have its uses. One thing I do like is their Rent vs. Buy tool. For the cities surveyed, it compares rental prices with home sale prices to help determine if it’s more affordable to buy or rent. Simple, huh?
If it turns out that buying is more affordable for you, we cross that hurdle and move forward. The next important task for anyone considering a home purchase is saving up a down payment and closing costs money. Not fun, but absolutely necessary.
The more you save, the more you’ll save.
First-time homebuyers are finding it tougher and tougher to get financing. From a recent NBC news piece:
“Financing of first-time homebuyers with low down payments threatens to become a significant problem in the U.S. housing market,” wrote Thomas Popik, research director for Campbell Surveys. “Fifty percent of first-time homebuyers use FHA financing, but FHA insurance premiums are increasing and underwriting is becoming more strict. Private mortgage insurance has started to fill the gap, but the long-term status of private mortgage insurance is in question pending the publication of the Qualified Residential Mortgage regulation resulting from Dodd-Frank.”
In previous years, the government put forth incentives to help first-time home buyers with their largest hurdle—down payment funds. The problem is… that the tax rebate is expired.
We’re back to saving money. So, how much do you need to save?
Gone are the days of zero down. When your local real estate expert puts you in touch with a reputable loan specialist, you’ll find there a number of programs that can help you buy a home with as little as 3% down.
But know this, the more you put down the better. Not only because it reduces the amount of money that you are financing, but also because it means you’re closer to the goal of 20% equity in your property.
Why is 20% equity important? Let me tell you!
Once you have 20% equity in your home, whether you paid that money at closing as a down payment or have done so little by little over time, you’ll no longer be required to pay Private Mortgage Insurance (PMI). Say, “Sayonara!” to PMI and you’re well on your way to building a more solid investment
In addition to your down payment, you’ll also need to pay closing costs. Closing costs fall into two categories.
The first category of closing costs is one-time only. Pay them on the closing day and you’ll never pay them again. These are things like attorney’s fees, title examinations, transfer taxes, and the like. You might also pay points in order to have a lower interest rate on your loan. Speak with your loan specialist at the very start of the process to identify which loan product is best for your situation.
The other category of closing costs is actually pre-paid costs. Regulations require that homeowners pay a minimum amount into their property tax and homeowner’s insurance “buckets” so that those monies are available when these bills come due.
Paying this money into an escrow account at closing may seem like a tough pill to swallow but it’s required. As long as you understand that this money is actually being saved for a future bill, it’s much easier to take.
Additional factors in your decision
One aspect of buying a home that we haven’t touched on yet is time. This is actually critical to our decision-making process.
There are a number of “Rent vs. Buy” calculators on the Internet. There is this fairly straight-forward one over on Realtor.com. Then a more complex one New York Times.
If you live here in Louisville, Kentucky here are some numbers to help you fill in the blanks in these calculators.
- Monthly Rent: Louisville offers a wide range of options for 3-bedroom apartments, starting at $500, with what I assume is not the nicest units, all the way up to $2,180 at the luxurious Woods of St. Thomas. Let’s use $1,000.
- Home Price: Last month the median home sale price was $155,000 but feel free to use your own.
- Downpayment: I used 5 percent, even though you might be able to find a loan that offers a lower rate.
- Mortgage Rate: 30-Year Fixed rates are nationally around 3.875 percent, but not everyone can qualify. Move it a bit higher to be on the safe side.
- Annual Property Tax: Here in Louisville, you can plan on about 1% of the value of your home, unless you live in Anchorage or Oldham County.
- Appreciation/Rent Change: Historically, Louisville homes appreciate 4 to 5 percent annually. But again, using conservative numbers of 4% for both builds a cushion for the unexpected.
As is typically the case, buying wins out after the first few years. Every situation is unique but take advantage of the free, online tools to chart your course.
One question that is very important is how long you plan to stay in your city. The longer the stay, the more likely buying is going to be a smart financial decision.
If you are in the middle, buying a home that is easier to sell in the future is something to take into consideration.
So there you have it! I hope you found this information helpful in answering your questions. If you want to learn more about Louisville real estate, please feel free to contact me.
One last point, make sure to enjoy the journey. Buying a home can be a stressful time but it doesn’t have to be. Tackling many of the tough questions upfront will make the rest of the process far more enjoyable.
