Spring 2017 is going to be a busy time for real estate (Shopping for a Home? Act Fast). Over 14% of homes purchased in February 2017 were on the market for 2 weeks or less. Average home prices increased 7% in February. Many Americans are in the real estate market right now.
Before you buy a new home, you should know the answers to these 15 questions:
Does it fit my family today?
My family is 4 people; my wife and I, and our two daughters. We don’t need a White House style mansion. The home I live in today is adequate size for my family. Each kid has her own bedroom. They have a full bathroom to share. My wife and I have a bedroom and bathroom. How many people are in your family? Does each of your kids need a bedroom? How many bathrooms do you need for your family, and for guests? Knowing the answer to this question will help you narrow the list of available homes.
I won’t be searching Trulia or Zillow for studio apartments or 6 bedroom homes any time soon.
Does it fit my family in the future?
If you plan on having 13 kids, you’ll need more than a 2 bedroom house. Before you make a purchase decision, you’ll need to have a plan for the future. Maybe you’ve decided not to have children. Can you get by with a master and a spare bedroom? What about the other aspects of the home? Is the kitchen big enough for you to prepare meals for your 13 kids? Does the pantry have enough space for your wife’s habit of overbuying Uncle Ben’s Minute Rice (mine doesn’t)? Also consider the size of the yard, the size of the garage, and the storage options. My cousin bought a house without a basement. She constantly complained about the lack of storage… now she lives in an apartment. She’ll never learn.
Does it fit my lifestyle?
I love sitting at home with an ice cold Coors Light and watching a football game from my recliner. I don’t need a lavish sitting room or dining room to keep up with my favorite past-times. All I need is a refrigerator and a television. My wife, on the other hand, likes to entertain. She prefers being at home, but around family. So we have somebody over about once a week. It’s usually her parents. So we need a larger area for people to sit. We need a half bathroom on the main floor. And when it’s the in-laws coming over, we need a heck of a lot more space to store the Coors Light.
Maybe you’re not a homebody like I am. Do you travel a lot? Is your home just a place to crash? Maybe you don’t need all the bells and whistles and you can save some money on utilities and upkeep by purchasing a smaller house with the necessities. Are you the ultimate party headquarters? If you are, you’ll probably need multiple areas for parties.
As you look through homes online or even in person, think about each space and how it fits with your life today and tomorrow. Imagine living in the home. Does your lifestyle fit comfortably?
How are the schools?
Zillow and Trulia are great at gathering local school district data. Another resource is Greatschools.org. This tool helps parents find schools in their zip code. It rates schools from 1-10 and ranks them based on search criteria. Even if you’re not having kids, or if your kids are already grown and gone, the school district is important. Why? Resale. You will have a much easier time selling a home in a district scoring a 9 than in a district scoring a 3.
How are the Taxes?
My parents bought a house with plans to flip it down the road. They bought it very low out of foreclosure. They made some enhancements, and lived in it for about 8 years. They decided to sell it. The house was about 3000 square feet and sat on three acres. The property taxes were over $9,000 a year. OUCH! For months, every interested couple bulked at the idea of paying $750/month in taxes.
Taxes hurt at resale, but it also sucks to pay them. I can’t imagine paying $750 a month in taxes. My taxes today are about $200 a month; more than enough to irritate me. I can’t fathom paying another $500 a month in property tax.
Another tax to consider is the local income tax. The town I live it has an income tax of 1.5%. The town I used to live in had 0% income tax. So instead of paying $0, now I have to pay a few hundred dollars a year in local income taxes. Something to consider. You can find the local tax rate on your county or municipality’s website.
Is it Safe?
Trulia also reports crime data (didn’t see it on Zillow). This is an important point for me. I don’t want to fear for my family’s safety when we’re at home. Start by reviewing the recently reported crimes. You can also find them on the police websites and usually in local papers. This will also give you an idea of the type of crimes committed. For example, if you’re looking at two homes in two different areas. The first has a moderately low rate with mostly minor disturbances. The other has a low crime rate, say 5 crimes in the last year were reported; but 3 of them were murders. Maybe you should lean more towards the first.
I’m not sure how often Trulia updates their crime data. I just checked my home on Trulia. The last reported crime in my area was in August of 2016, 6 months ago. Make sure you look at the other data points outside of the real estate site when answering this question.
How long will I stay?
If you’re going to live in a home for under 5 years, I urge you to rent. I have two caveats to this advice. If you can buy for +20% under market value (a flip). OR if you’re able to pay 100% cash for the home. Mortgages are built for the banks to get their interest first. According to Bank Rate a $150K mortgage will cost you $760 per month (not including taxes or insurance). Your first payment will be $198 toward the principal and $562 toward the interest you owe. 5 years into the mortgage, you will have paid an estimated $33K in interest. You’ll have paid $14K in principal. You’ll still owe $136K.
If you are able to sell your $150K purchase for the same price in 5 years you’ll have $14K coming your way, right? Nope. Standard closing costs are anywhere from 2-5%. Or $3,000 up to $7,500 depending on where you live. $14K in equity is now reduced to $9K… not to mention the $33,000 in interest you’ll never get back. Selling your home after 5 years actually ends up netting a loss of $24,000. If you aren’t ready to make a long-term commitment to a home, please, please, please rent.
What’s my credit score?
Your credit score is very important. This is the number the bank uses to determine your risk as an investment. They are deciding if they’re going to give you lots of money. They’ll take other things into account: gross income, outstanding debts, and net worth. But the Credit Score is the strongest data point on their decision tree. If you have a terrible credit score then one of two things will happen. You don’t get a loan, or you get a ridiculously high interest rate. If you have a great or excellent credit score, then you’ll get a loan and a low interest rate. This doesn’t matter at all if you pay all cash for the house. Paying cash for a home is a great life goal.
How much can I put down?
Debt is bad. If you’ve read any of my other posts, you know I hate debt. It’s a ball and chain holding you down. You thought that was your wife didn’t you? If you are able to put money down on a house, you should do it. This allows you to borrow less money. Now, you’re paying interest on a smaller dollar amount. Don’t exhaust your emergency funds to put money down, but don’t skimp out on the down payment. You should maximize this piece of the purchasing puzzle.
Debt is Bad
Will I pay PMI?
Private Mortgage Insurance is a way for the banks to hedge their bets. Just like we buy insurance to cover us against the worst things in life, banks can insure their loans with a PMI payment. Banks aren’t in the business of buying things. They use their money to make more money. Therefore, you have to pay their insurance premium. Seems pretty crappy, but if you want their money you have to play by their rules.
What type of mortgage should I use?
There are mainly 3 types of mortgages: Fixed Rate, Adjustable Rate (ARM), Interest Only (Jumbo). Within these loans there are FHA and VA options which I won’t get into. I’m not going to get into too many details here, just know, the Fixed-Rate mortgage works best for me. This will guarantee your rate will never increase (or decrease). If interest rates go down 3, 5, 10, or even 15 years into your loan you can refinance. For now, my advice is to use a Fixed-Rate mortgage.
What will it cost to insure?
Typically, homeowner’s insurance is paid out of an escrow account as part of your mortgage payment. Same goes for property taxes. For example, the 150K mortgage will leave you a payment of $760 per month of principal and interest. You’ll have to add in property taxes and insurance. I only know what I know (is that a statement or what?). My current monthly mortgage is $1400 per month. I pay about $140 per month in insurance and $250 per month in taxes. So my principal and interest payments make up the balance of the $1400. Shop around, don’t just use the company your parents use. I used my parent’s guy for a while, then I decided to shop and I saved $200/year. If I’d done my own research when I bought my first house 8 years ago I wouldn’t have wasted $1600 just because my parent guided me to use State Farm. Today I use American Family Insurance.
Here’s my agent, she’s great: Jeff's Insurance Agent if you’re in the Ohio area, I strongly suggest you check her out. She insures my car too and I get a multi-line discount as well as a discount for paying 6 months at a time. Tell her I sent you, and I said ‘Hello.’ It won’t get you anything, but she’ll appreciate it.
What will I spend in utilities?
The real estate sites don’t give you this information. You’ll have to do your own research here too. Ask your friends and neighbors what they are paying for water, sewer, trash pickup, electricity, natural gas, or any other utilities. You can adjust their numbers based on the variation in the size of the house as well. Utilities aren’t cheap. I pay about $250/month in electricity, natural gas, water, sewer, and trash pickup. This is not part of your mortgage, it’s just the cost of keeping your house running.
What will I spend in upkeep?
Do you have a lawnmower? Will you need one, or will you pay someone to cut the grass? What about the simple things like snow removal, changing light bulbs, replacing your furnace filters? What about the big things like replacing an appliance, repairing the gutters, or staining the deck? These types of expenses are the costs of homeownership we forget during the house hunt. The house I’m in today is great. We’ve got a 2 tiered deck on the back, it’s really nice. However, the stain was wearing thin and the wood was getting weak. So I decided to sand it down and stain it. After about 9 hours of staining, I was 5% done. I got a quote for someone else to do the work. It’s going to be an expensive deck to keep up. He said it’d last 2-3 years…
What would you change on Day 1?
If this list is long, don’t buy the house. If this list is short, don’t buy the house. If the list is minor, and you’re comfortable with the answers to all the other questions- go for it. Congratulations, Homeowner!