Sponsored by Frost Bank
With the arrival of our second kid, we’ve outgrown the current home we’re renting and are looking to buy a new home. We’ve already spent months researching the right neighborhoods, what houses at each price point should look like, and because I’m a huge numbers guy, even the home appreciation rates per nieghborhood. Buying a home can be one of the biggest purchases you’ll make in your life, and because the decision to buy a home is often an emotional one, it’s a good idea to keep some important things in mind to make sure you make the right choice. I’ve just recently gone through most of the process, so I wanted to share my tips to help with your home buying process.
Set a budget before you even start shopping. This is the most important factor to consider when buying a home, but it’s surprising how many people don’t put more thought into it. Use a monthly budget calculator, like this one, to understand what your monthly expenses are and what type of monthly mortgage you can afford. Don’t forget to factor in the cost of property tax, home owners insurance, regular home upkeep that will arise like replacing the roofing, and depending on how much of a down payment you can make, mortgage insurance.
Next you’ll want to meet with a bank to find out how large of a loan they’ll give you based on your income and monthly expenses, and at what interest rate. We’re talking with Frost Bank, because they’re local to Texas, have competitive rates, and an easy loan application.
Treat It as an Investment
When you’re buying something worth hundreds of thousands of dollars or more, it only makes sense that you will want to make the most money from it if you decide to sell it later. As we’ve seen with the crash in 2008, home prices aren’t guaranteed to always appreciate, but that doesn’t mean you shouldn’t still give yourself the best chance possible. Here’s what to look for:
- Don’t buy the nicest hose in the neighborhood. The value of that home will be pulled down by the lower priced homes around it, while the less expensive homes will gain value from being around other nicer homes.
- Buy the smallest house you can comfortably live in. Smaller homes, such as those under 1,200 square feet have appreciated 7.5% per year from 2011 to 2016, while homes larger than 2,400 square feet only increased by 3.8%. The thinking around this is that many new home buyers are looking for starter homes that they can afford, while the baby boomer generation are looking to downsize.
- Don’t buy bedrooms you don’t need. The average home with 5 bedrooms appreciated on average 4.3% per year between 2011 and 2016, while homes with two bedrooms appreciated 6.6%. This is because Americans are having fewer kids than they used to, so there is more demand for the smaller homes.
- Find homes with open floor plans. Open floor plans allow for more flexibility in the layout of the home and allow it to appeal to more people.
Save Enough for a 20% Down Payment
In many cases, if you aren’t able to pay a 20% down payment on your home, banks will require private mortgage insurance (PMI), because a loan of more than 80% of the home price is risky for them. PMI can cost anywhere from .5% to 1% of the total loan amount per year, and can add hundreds of dollars a month to your mortgage payment. That’s why if you can afford it, it makes sense to put a 20% down payment on your home. If you can’t, don’t worry, 65% of home buyers in 2015 put down less than a 20% down payment on their homes.
Buy a Fixer Upper
If you’re ok living in a home that isn’t exactly what you want and doing some upgrades yourself along the way, you could significantly increase the value of your home. There’s a reason so many people do it.
Buy Less Than You Can Afford
Life is filled with surprises, and if an expensive one comes up in the future, the last thing you’ll want to worry about is making your mortgage payment. Also, if most of your money is going towards your mortgage, you may not have much left over to do other things you enjoy. It’s easy to get caught up in buying the nicest house you qualify for, but it’s usually not the best decision.
Buy Furniture Slowly
When most people move from an apartment to a new home, they want to fill their new home with new furniture, and of course they do. It’s a lot of fun to pick out furniture for your new home. That’s why it’s a good idea to not buy it all at once. A lot of money is moving around when you’re buying a new home, so it’s a lot easier to justify spending “just a little more,” but this is where people get into trouble. Give yourself some time in your new home to see what you really need and where your money is best spent. By slowing down the process and buying your furniture over the first 6 months, instead of immediately, you’ll have time to make smarter choices and avoid the spending frenzy.
Plan Life Goals Before Buying
Buying a home is a lot more serious than renting. With an apartment or a rental home, if a life change comes up, like a new baby or a new job, it’s not too expensive to break the lease. You pay the fee or wait out the lease and move on. With a home, you’re going to be here a while. Even if you decided to sell soon after you purchased the home, there’s no guarantee someone will buy it immediately.
That’s why it’s a good idea to plan out what you expect to happen over the next few years. Are you planning on keeping your current job? Maybe you’re thinking about going back to school or starting your own company? Maybe you’re talking about having a baby soon and your wife soon won’t be working as much as she is now? No matter what you’re plans are, having an idea about what to expect can help you make better decisions today.
Have any other tips you’d like to share? Let me know in the comments below!