by CJ Miller, CFP, RMA
Buying a home has been a staple of the American economy for decades. That said, those that rush to buy a home too quickly may face severe financial hardship. There are several realities of homeownership that often go overlooked, especially by first-time homebuyers.
Managing Unexpected Costs
When making such a large purchase, it’s vital to account for unexpected costs. These costs often go unbudgeted for and can turn a great real estate purchase into a financial nightmare. Repairs, for instance, are commonly underestimated by homebuyers. New appliances, roof repair, plumbing leaks; The possibilities are endless and unpredictable. A good rule of thumb is to budget 3% of the home value for maintenance and repairs per year.
Another often overlooked expense is homeowners association (HOA) fees and mortgage insurance. In addition to principal, interest, taxes and insurance (PITI), HOA fees and mortgage insurance are added to your required monthly payment. HOA fees are charged by a community to maintain common property and amenities. Mortgage Insurance will be added to your payment by your lender if you make a down payment of less than 20%. These fees can turn a modest mortgage payment into one that is unmanageable and shouldn’t be forgotten about when planning for a home purchase.
Tips for Saving Money During the Buying Process
There are ways that you may be able to save money during the home buying process to help offset some of the unforeseen expenses. One option is to use the seller’s realtor or hire a personal connection for a reduced fee. Most realtors charge 6%, and if you negotiate a lower fee, it will save you in the long run.
Another option to save money is to hire multiple inspectors with different specialties to examine the property before you make an offer. Even though you’ll spend more upfront hiring multiple people, any additional faults in the house identified before purchase will give you a better idea of repairs to come. In some cases, you may even be able to negotiate repairs of some of these items in advance of the purchase paid for by the seller.
When SHOULDN’T you buy a home?
Although it seems like everyone is racing to buy their first home, it certainly isn’t for everyone. You may want to reconsider making the commitment if you:
· Have unstable or variable income
· Aren’t sure where you want to live yet
· Don’t have an adequate emergency fund
· Have other outstanding liabilities or financial commitments
About the author
CJ Miller, CFP®, RMA® is a financial planner with Sensible Money in Scottsdale, Arizona. Miller is also a member of the Financial Planning Association (FPA) of Greater Phoenix Board of Directors and involved in the Active 20-30 Club.
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Don’t Cheat Yourself With the 4% Rule
Sensible Money's next online retirement planning class, Don’t Cheat Yourself With the 4% Rule, will be on Thursday, March 11, 2021.
Many retirees and advisors gravitate to simple rules of thumb, like the 4% rule, which says you can safely withdraw 4% of your portfolio each year, increase that withdrawal with inflation, and expect to have your income last for life.
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Who Should Attend
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Dana Anspach is the author of Control Your Retirement Destiny (in its second edition) and of Social Security Sense, contributes to MarketWatch, and spent eight years writing for About.com as their MoneyOver55 expert and for TheBalance.com as their Retirement Decisions expert. She is the founder and CEO of Sensible Money. Dana is also a CFP®, RMA®, and Kolbe Certified Consultant who began her financial planning career in 1995.