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The American dream has always been to be able to purchase your own home to grow old in. I know my parents had that dream and they fulfilled it. They worked hard and were able to purchase their first home in New York over 42 years ago. I can tell you today that their house has appreciated in value over 15 times. Not a bad investment, right? Home ownership sounds great in theory but people are usually unaware of all the costs they need to be prepared for before they even purchase a home and the expenses that continue after.
If you have decided that you are ready and committed to purchasing your first home, then please read on to learn from my experiences. I have been through this process twice so far, so I will let you in on everything I’ve learned.
Do you need at least a 20% down payment?
Yes, this is absolutely true. If you have less than 20% cash to put down on a house then keep on saving until you do. Or find a house that costs less. It’s that simple. I would actually recommend putting more than 20% down if you can. I know banks will try to entice you and offer 0% or 5-10% down. But I am highly against this. Your monthly mortgage payments will be astronomical if you put less than 20% down and you will pay much more in interest. Also, if you put less than 20% down, you will be required to pay what is called PMI. Private Mortgage Insurance. This fee varies depending on many factors such as your credit score and the size of your down payment. But they are typically 0.3% to about 1.5% of your original loan amount. So yeah, it doesn’t pay to put less than 20% down.
But if you go ahead and put down less than 20%, good luck. Just don’t make me say, ‘I told you so’.
Don’t forget about the Closing Costs
When somebody finds a home they fall in love with and wants to buy, they tend to only focus on the sale price of the home. Many people forget about this wonderful thing called closing costs. It really is not wonderful at all and I absolutely hate it. Unfortunately there is no way to get around it. Closing costs are basically all the admin paper work you will need to fill out and submit before you finalize the purchase or sale of your home. They include taxes, appraisal fees, title searches, etc. Closing costs usually run between 2% to 5% of the purchase price of the home. So if you are looking to purchase a home for $400,000, you will need approximately another $10,000 just for the closing cost. This is ON TOP of your 20% down payment.
Do you need a Real Estate Attorney?
The answer is Yes and No because it varies between each state. In New York State where I live, you are required by law to retain a real estate attorney when purchasing and selling a home. I know some states like Florida does not require an attorney. But if you are one of the lucky ones like me, you will need to shell out at least an additional 1K to pay for a real estate attorney. Each attorney charges different fees, so shop around or get a recommendation from somebody on whom to hire. Real Estate Attorneys’ do their due diligence on all of the paper work that is related to the purchase of your home. They are basically there to ensure everything is in order and you are not getting taken for a ride.
How many years should your mortgage term be?
The answer to this question is different for every person. In my opinion, I think the best mortgage deal is the 15 year fixed rate, but ONLY if you can afford the steep monthly payments. With a 15 year mortgage, you will be paying significantly less interest than if you took out a 30 year fixed mortgage. Also with a 15 year term, the interest rate tends to be lower than a 30 year. The beauty of it is that 15 years will fly by (believe it or not) and you can own your home outright sooner rather than later.
I’m not a fan of the floating rate mortgages. If you absolutely know for sure you are going to sell your home within a few years, then a floating rate mortgage may be the best fit for you. But unless you are a world renowned psychic, then who really knows what the future holds? I like certainty. And securing a fixed mortgage rate guarantees that. I would have never imagined living in a shoe box sized studio apartment for 12 years. But guess what? I did. Luckily, I had a 30 year fixed mortgage rate on my place so I didn’t have to worry if my interest rate would go up.
Property Taxes, Common Charges, Maintenance, HOA fee and Insurance…They only get higher
Wouldn’t it be great to only have to pay your mortgage after you close and move into your wonderful new home? Yeah, I wish. Unfortunately that’s not the world we live in. Depending on the type of home you purchase, whether it be a detached house, condo, co-op, townhouse, etc. You will need to pay Property Taxes, Common Charges, Maintenance, HOA fees and Insurance on your home EVERY MONTH FOREVER. You heard right, so even after you pay your mortgage off in 15 to 30 years, you will still need to pay Property Taxes, Common Charges, Maintenance, HOA fees and Insurance on your home. And they only increase throughout the years. Just to put things in perspective, when I first moved into my shoe boxed size studio apartment 12 years ago, the monthly maintenance fee was about $325. When I moved out 12 years later, it was approaching $900.
People often forget to include these expenses when planning their long term budgets. You need to keep in mind that if you plan on living in your home for the rest of your life, you will need to cover these expenses long after you retire and consider how much they will rise as the years go by.
Furniture isn’t cheap
Unless you purchased your new home with the furniture included in the price, then you will probably need to buy new furniture. I know some people will bring their old furniture with them but again, you will still probably need to buy some new furniture, especially if you are moving into a bigger space. And furniture is not cheap. You can save a few bucks if you shop at an Ikea, but even those items add up. New beds, sofas, paintings, chairs, tables, rugs, cribs, dog bowls, etc. all add up quick. Of course the bigger your new home is, the more furniture you will need, which means the more money you will have to spend. So also keep in mind furniture expenses when you buy a new home. Who wants to buy their dream house, only to have nothing to sit or sleep on?
Does your new home need any updating?
If you are purchasing a home at a great bargain price, that usually means it needs some work or a complete gut renovation. Take it from me, unless one of those superstars from the HGTV network is doing the renovations for you, then chances are it’s going to be a rocky ride. Whatever your renovation budget is, just double it because that is what the true cost will most likely be when everything is said and done.
If your new home doesn’t need any major renovating, you still have to consider if it needs a new roof, counter tops/tiles, new floors, plumbing updates, new appliances, and the list can go on and on. Even if you are a handy person and can do some of the work yourself, you still need to spend money on the materials.
So as you can see, there are many costs attributed to home ownership. Many people think they just need the down payment. But in reality, you will need to be responsible for many other costs for as long as you own your home. Now you know the true costs of owning a home. If you have the money to handle it all, then I say go for it. If not, there is nothing wrong with saving until you can truly afford your dream home. Otherwise it can turn into a nightmare.