13 Nov 2014
A home is a wonderful thing, it means privacy, independence, to some it means success and status symbol. But a home is much more than all these things, it is a huge financial commitment and I don’t just mean the mortgage payment.
The American Dream
Buying a home is much more than achieving the American dream, it requires a lot of thought and planning past the monthly mortgage payment. First, the average person purchases a home for a better, safer environment for yourself and family not as an investment. It’s about having your own roof.
Let’s face it, apartment life means you are really coexisting with many other people in the same building, parking your car in a lot full of other cars rather than your own personal garage. Some people don’t live in an apartment; they are still living at home with parents or relatives. Not the ideal and not your own roof.
Purchasing a home however is much more than getting your own roof. It is much more than looking at the numbers and determining you can afford the monthly payment. It is about realizing the whole picture of home ownership. Mortgage, insurance, taxes, upgrades, repairs and in some cases homeowner association dues.
Many times taxes and insurance are included in your monthly payment as escrow; it is a portion that the mortgage company puts aside and pays for you at the end of the year or when the tax and/or insurance payment is due. Personally, I prefer to make these payments on my own rather than relying on the mortgage company, but that is personal preference and discipline as I have to make sure I put that money aside each month myself.
Besides the normal home owners insurance you may also need to consider flood insurance, possibly a umbrella policy, neither of which is a part of this post but I will discuss them in future posts.
A Little Decorating
Once you are in a home, especially if it is your first home you will be very surprised how many other things you will find you need (or want) to make your new house a home. Anything from major projects like remodeling to small things like new blinds, throw rugs. Most of the time a new home is much bigger than your previous residence so you will start looking furniture to fill those empty rooms. Be careful, those furniture stores love to lure you with those “same as cash” credit cards that nine times out of ten will cost you far more than cash.
You end up buying “stuff” for your new home, stuff that wasn’t in your budget, stuff that now has increased your monthly bills. Then when you think you have that all under control, the reality of home ownership hits, your hot water heater breaks or the A/C isn’t blowing cold and its 95 degrees out. Think it can’t happen? It can, because it’s a house and things in a house break and I guarantee they won’t break when you have an abundance of money, unless of course you are living debt free, but considering 78% of Americans carry credit card debt, chances are you are not living debt free.
Let’s just say nothing breaks for a few years you may have to deal with the weather. If by chance you are living in a hurricane prone area and you have damage to your home caused by a hurricane you may be thinking, no problem, that is why I have insurance and my deductible is only $500, but in the case of a hurricane, your deductible could be 2% of the value of the insured value of your home. So for a home that is $180,000, that is a $3,600 deductible.
Why am I sharing all this? It may sound like I am trying to convince you not to buy a home. Well, I think owning a home is fantastic and recommend it as long as you know all the facts and are completely prepared, both financially as well as emotionally. I want you to think through all the behind the scenes expenses of home ownership, things that your Realtor may not tell you nor will the bank.
The bank is only concerned with your credit, debt to income ratio, not about all the background expenses. Realtors are great and if you buy a home I recommend you find a honest, well experienced and one who has a great reputation. Still, they may not tell you all the personal aspects of owning a home.
What I recommend is before you even get into the home buying experience, make sure you have a working budget. One that is accurate and that you are following for at least three months preferably six months. You can work your budget simply by putting numbers down on paper or into a basic spreadsheet on your computer. There is also some very inexpensive budgeting software that actually helps you keep better track of your numbers than paper or a spreadsheet.
After you have your working budget you can then decide if you can truly afford a home along with the additional expenses that come with owning a home. In my case for example, you know I don’t do anything on credit so that meant some things couldn’t be fixed up right after purchasing.
I purchased a home that was 30+ years old, there were a lot of things that needed to be upgraded and fixed up. Some of which I could do right away, things that I had saved for and planned for. Other things like new windows had to wait. I didn’t put in new windows until I had been in my home for over a year and it wasn’t until after I put in new windows did I put in new window treatments. Self control and planning, planning ahead of time. Did I want new windows and blinds right when I moved in? You bet, but by waiting, planning and budgeting, I was able to put windows in and new blinds all with cash.
Prior Proper Planning
It is when a new home buyer doesn’t properly plan for all the expenses of home purchasing that so many get into financial trouble and then end up coming to me scared and wanting to know what to do because they just received a foreclosure notice. My goal is to get you thinking about all those expenses before they happen, rather than while they are occurring and you haven’t planned for them and are tracking just how much they are costing you.
Buy Below What You Can Afford
One more thing to consider before purchasing a home is purchase a home that is far less than what you can actually afford. I touched on this in my post Live Like You Lost Your Job. Plan before you purchase your home of the possibility of job loss. Don’t assume you will continue to have two incomes or that your current income will never go down. Plan for the worst and hope for the best. It is far better to be in a home that is very affordable than one that is at the high end of your budget dollars.
As I said, all this is not written to discourage you, but rather to help you so that your new home purchase does not become a nightmare and does become the American dream.