Rent is getting more expensive. You have been saving up for a while now and this year is your year to live up to the American dream. Buying a home is a big responsibility and a long-term investment. A miscalculation can really affect your life.
You may feel prepared to purchase a small piece of real estate. However, which options are the best choice from your financial perspective? It is essential to be educated before you are making any decision. In this blog, I will present a few aspects that need to be considered before purchasing your first home.
Does your current finance allow you to make a down payment?
Ideally, you should put down at least 20% of the cost of the home to avoid having to pay private mortgage insurance (PMI). It is very risky for the bank to secure the loan with a very little to nothing down payment. The purpose of the PMI is to protect the mortgage company.
Related: Where to buy home in Victorville.
If you don’t put down the 20%, here is the breakdown of the additional monthly cost:
- PMI varies from 0.5% to 1% of the total loan annually depending on lenders. The median listing price of U.S. homes, according to Zillow, is $261,500 (as of Feb. 28, 2018).
- One percent of $261,500 is $2,615.
- This means you could be spending as much as $218 ($2,615 /12 months) a month on the insurance.
Over 30 years, you could have saved $78,450 if you put 20% down.
The interest rate is currently high
Every month you pay back a portion of the principal (the amount you’ve borrowed) plus the interest accrued for the month. The lower the interest rate, the better. A lower interest rate means that your monthly payment will be contributed more towards the principle and not the interest. It is essential to understand how the interest rate is calculated.
Looking at the example from the information above provided by bankrate.com.
- Consider a 4.522% rate on a $240,000 loan ($300,000 – $60,000).
- In decimals, 4.522% is 0.04522, and when divided by 12 it is 0.0038.
- Multiply 0.0038 times $240,000, and you get $912 as the monthly interest payment.
- What this means is out of $1,216 monthly mortgage, only $304 goes towards the actual principal.
Now let’s look at the same example but with a 3% interest rate.
- By using the same calculation, your monthly interest will only be $600.
- This means a larger amount ($616=$1,216 – $600) will be paid towards principle instead of just $304 with a 4.522% interest rate.
At the beginning of the loan, the principal gets paid off slowly, as most of the payment is applied to the interest. The closer you get to the end of your 30 years term, the more of the amount will go to paying the principal down.
Home is getting more expensive
Mortgage rates hit their highest point in seven years last month, and home prices have jumped 6.5% since mid-2017. According to the Housing and Mortgage Market Review from Arch Mortgage Insurance, interest rates are only expected to increase as the year goes on. In fact, projected monthly payments to buy the same-priced home could jump 10 to 15% over the next year.
In California, the median home value is $539,400. California home values have gone up 6.1% over the past year, and Zillow predicts they will rise 8.6% within the next year. This hike in price will make it more difficult for first-time homeowners to come up with the 20% down.
You don’t know your timeline
You may be moving to a different city, getting a new job, receiving a promotion, your kids need to go to a different school… It is difficult to plan for these events in your life, but it would be best to still think about this before your purchase your home. Besides putting out the down payment, the homeowner also needs to consider closing cost, maintenance cost, attorney fee, and home association fee… These fees can cut deep into your pocket and it will not be worth it if you plan to only stay for a couple of years. I purchased my first home here in Victorville, California because I plan to stay for at least 5 years. I think 5 years is a good enough time for me to build up my resume. The city living style also allows me to build up little savings on the side. It is better this way because the majority of my paycheck will go towards the mortgage if I purchase a home somewhere else.
You are not committed to home ownership
Being a homeowner is different than being a renter. You might need to give some touches up such as repainting the living room, putting on new carpet, cutting the backyard grass, and fixing the water pipes. These chores are considered a hassle for some people. And if you are not ready to take care of these tasks, you might want to think twice.
Takeaway points
I want to congratulate you on taking a big step towards your financial goal. Purchasing a home is a nerve-wracking decision, and you deserve all the help you need. I hope this article will help you in deciding whether or not buying a new home is a good choice for you. I repurchased my first home in 2015 when the market was still a little lower compared to the current price. I am pleased with my decision and will be more than glad to help you answer all the questions.
I want to thank the following resources for helping me with this blog: Trulia.com, Investopidia.com, Moneycrashers.com, Usnews.com, Askalender.com, Cnn.com, Bankrate.com, and Latimes.com.
2022 UPDATES:
As I am going back and updating this blog, inflation is at an all-time high and the Fed has increased the interest rate up to 6%. It is becoming more difficult for first-time home buyers to purchase a home right now because the home price has skyrocketed over the past five months since the beginning of 2022. In my area of Southern California, I have seen houses that were at $500,000 five months ago increase to over $700,000. No one knows where the market will be for the next five years so I would be very cautious when purchasing a home at this point. First time home buyer need to have a strong cash reserve in case something goes wrong.
