Whether you’re a young 20- or 30-something saving for your first down payment or a 60-something looking for that beach condo, home shopping is one of the most exciting times.
So when it’s time to make your big purchase — starter home, upgrade home, or retirement pad, there are four very important considerations.
1. Emergency Fund
As a financial coach, I was trained to recommend completing Baby Step 3 before considering a house purchase. Once you have 3-6 months expenses saved in a money market account. (We use VMFXX which is the settlement account of our Vanguard Roth IRAs.)
For a typical families this is $10,000 to $15,000. More if you have a seasonal income (e.g., swimming pool installer, landscaper, etc.). Less if you have a secure job (e.g., nurses, teachers, etc.).
2. Down Payment
When you’re in the market for a home, The Total Money Makeover calls for Baby Step 3(b): saving for a down payment. We recommend at least a 10% down payment. But 20% down will get you out of paying private mortgage insurance, a.k.a. PMI. This could save you a couple hundred dollars a month!
Things like the FHA and VA mortgages that only require 3% down (or 0%!) are flirting with disaster. As of October 2020, delinquency rates on FHA, VA, and conventional mortgages were 11.7%, 6.1%, and 3.1% respectively.1 Although this was a result of relief protections of the CARES Act, being over-leveraged pre-pandemic was definitely not helpful to the situation. In any event, 84% these loans were in forbearance, compared to just 11% in May 2020.
3. Work with a Good Realtor
Realtors know the market better than you, especially if you are relocating to a new area. They know which areas are buyers markets and sellers markets. They know the real real estate taxes. They know the approximate utility bills. They know the HOA fees and deed restrictions. And so forth…
Also any offer should definitely, definitely, definitely be contingent upon a home inspection. How’s the roof? How are the windows? How’s the furnace? Is it well-insulated? What about mold? Termites? A home inspection is money well-spent. Don’t skimp here.
4. Hidden Expenses
Finally, pay attention to the hidden expenses. As a homeowner, you’ll learn there’s so much more than just a mortgage payment (principal and interest).
You’ll want to do the sinking fund approach for taxes and insurance. If you’re moving from a smaller place or apartment, you may have higher utility bills. You may have HOA fees. There may be deed restrictions requiring landscaping and so forth. (This is why we work with a good realtor.)
Final thoughts…
Paying attention to these important details will help you avoid the pitfalls. In the end, we all want our homes to be a blessing, not a curse.
As Always…
Thanks for reading! I hope this information provides food for thought. Remember that I am not a certified financial planner, a certified public accountant, a licensed real estate agent, etc. My content is for educational purposes. I am a math educator who happens to have a finance degree. Like they say, never take financial advice from a math teacher! (Do they really say that?)
But you should spend less than you earn, invest the difference, and stay out of debt!
I would so appreciate your sharing my content with anyone you feel could benefit. And if you would like a free exploratory conversation or just want to shoot the breeze about personal finances, call me and leave a message or send a text to 570-731-0425.