Today’s guest post is from a fellow millennial personal finance writer, Michael L., from Super Millennial. Check out his bio at the end of the post!
Are you ready to be a homeowner? It may not happen in your 20’s or maybe even 30’s with rising real estate prices & increased student debt but it is still a financial goal for many. It’s one I was able to accomplish at 27 years old thanks to a lot of discipline and planning. The experience can be nerve wracking from start to finish but ultimately very rewarding. Before you even start looking it’s important to evaluate where you are with your life first; both financially & professionally.
Think you’re ready to make this huge purchase? Make sure you are 100% sure by following this easy checklist:
Simple; the higher the credit score the lower the interest rate you’ll get on your mortgage, which is usually a 30-year, fixed cost loan. Make sure you’re signed up for Credit Karma & be aware of your score before house shopping. Ensure you don’t have minimal outstanding debt, any bills that have accidentally ended in collections or anything else that could potentially lower your credit score. Make sure to also utilize your annual free credit report to find any inconsistencies that could affect your score.
Don’t spend more than 30% of your TAKE HOME (after tax) pay on your housing. If something happens to the house you’ll be vulnerable if you have a change in salary or additional upkeep costs. After just celebrating my one-year home-owning anniversary I can confidently say something will break or need to be repaired. Make sure you’re prepared by not using all of your salary on the mortgage payment.
Your emergency fund is your safety net, it’s not your down payment! This will be money not associated with buying a house & is there for emergencies only. When you save for a down payment make sure to have two separate accounts to have saving goals for each. I recommend using Ally Bank for your main savings account for its easy setup, low fees & guaranteed 1% interest rate.
10%+ Down Payment
Ten percent is the absolute minimum I’d recommend putting down towards your house. I was personally adamant about 20% to avoid private mortgage insurance (PMI) and have a lower monthly payment. Having PMI can increase your mortgage payment from .5 – 1.5%. On a $200,000 home that can be nearly an additional $1,000/year.
This was a bit of a shock for me, I was so focused on saving for the down payment, finding a good interest loan & doing house research I nearly forgot about closing costs. According to Zillow “Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.”
Make sure to use the closing cost estimate tools and talk with your loan representative to factor in the closing costs as it is usually an additional fee for the down payment. Sometimes the seller will pick up partial or all of the closing costs.
Plan on moving in the next 5 years
Think of buying a home as a long-term deal, similar to investing stocks (you’re in it for the long game, no the quick profit). Plus if you sell your house within two years you’ll get CRUSHED on short term capital gain taxes. The longer you live in your house the more you will save over time.
If you can afford it, have good credit, and plan on staying in that location for a while I’d recommend buying as opposed to renting. Renting may have benefits at times but at the end of your lease, you’ll ultimately have nothing to show for it. Obviously, with home-owning, you’ll be able to have the “pride” of ownership and a place you can call your own. Here are some great benefits of homeownership:
- Equity: When you rent you’re throwing away money, but mortgage payments let you build ownership interest in your own home.
- Taxes: When you own a home you’re able to write off your interest & property taxes from your income. The earlier you are in your mortgage the more money you’ll be paying towards interest and less towards principal.
- Savings: Home-owning automatically builds equity in your home because part of your payment (principal) is going back towards the house.
- Freedom: Do you want accent walls? Hardwood floor? Do whatever you want, it’s yours!
- Consistency: Assuming your mortgage is a fixed rate your payments will remain the same for the next 30 years. No need to worry about rent increases!
- Appreciation: Generally home values have risen 5% from 1970-2014, despite the housing market collapse. So even though it’s not a “liquid” investment if history does repeat itself you would make money if you sell your house in the future.
Remember the old saying, “Landlords get rich, and renters stay poor.”
If you are a homeowner, how did you know you were ready? What advice do you have for those first-time homebuyers?
Michael L. is the creator of Super Millennial. He teaches people how to evaluate their financial situation, simplify money management & learn how to automate your investments to reach their financial goals. Subscribe for his personal finance “Keys To Success” PDF and blog updates HERE.
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