Making the dream of homeownership a reality
Homeownership can be the bedrock of financial security. Paying off a mortgage over a number of years can build a significant financial asset.
In fact, the typical older homeowner has $129,000 in home wealth1, which accounts for a substantial portion of their net worth2 – giving retirees more retirement savings options.
But buying a home for the first time is a complicated undertaking, and it’s important to know the facts before making the investment.
Consider all options
Homeownership isn’t for everyone, particularly for those thinking of moving in less than five years. Between the closing, realtor fees and moving, associated costs could eat into home appreciation during such a short time period.
But there are other ways to help set up future financial security. Saving for retirement, building up emergency savings and establishing a child’s college fund are also important objectives. A home may not be a wise choice if it leaves homeowners without other funds for other goals.
How much can you afford?
Financial professionals recommend spending no more than 36 percent of income on debt, including a mortgage.3 In other words, a family that earns $6,000 a month should spend no more than $2,160 on debt payments. If that family also has credit card balances, student loans and automobile payments, a smaller mortgage may be less of a financial burden.
Keeping the debt-to-income ratio even lower can create space in the budget for any unexpected costs.
Get a handle on hidden costs
There are a lot of costs to consider when it comes to buying a home from the down payment to closing costs.
Borrowers should expect to pay an additional 3 to 5 percent of the purchase price to cover the costs of origination, appraisal, inspection, and title search.4 Homeowners also need to plan for moving costs, realtor fees and miscellaneous expenses. Understanding these costs can help set a realistic budget.
Get credit ready
Higher credit scores allow borrowers to pay less interest, so it’s wise to make sure a credit score is in tiptop shape before shopping for a mortgage. With a score of 760 and above—considered excellent by credit bureaus—a borrower would pay $945 a month for a $200,000, 30-year fixed mortgage.5 But with a score of 660, borrowers would be required to pay $1,016 a month. Over the course of 30 years, that’s a difference of more than $25,000 in interest payments alone.
Borrowers should check their credit score before finding a home. Lowering debt and making timely payments can improve a score within just a few months, but more serious credit issues can take longer to work out.
Follow a monthly budget
Aside from principal, homeowners must also pay interest, taxes and insurance (often referred to as PITI) on a monthly basis. On top of that, there might also be homeowners’ association fees. Additionally, borrowers with less than 20 percent equity in their homes will often be required to pay for private mortgage insurance.6
Home experts recommend budgeting 1 to 3 percent of the home’s purchase price each year for maintenance and upkeep.7 For a home valued at $300,000, that means $3,000 to $9,000 each year. While routine maintenance may help mitigate big-ticket repairs or renovations each year, making upkeep a part of the house budget lets homeowners prepare for even the biggest home surprise.
When you’re ready to make the dream of homeownership a reality, speak with a financial advisor to develop a plan that puts you on the strongest possible financial footing.
1Butrica, Barbara and Simmons, Patrick. “Starting to Understand the Potential Role of Home Equity in Enhancing Retirement Security.” Fannie Mae. November 1, 2016. http://www.fanniemae.com/portal/research-insights/perspectives/110116-butrica-simmons.html
2“Securing Our Financial Future: Report of the Commission on Retirement Security and Personal Savings.” Bipartisan Policy Center. Page 69. June 2016. http://cdn.bipartisanpolicy.org/wp-content/uploads/2016/06/BPC-Retirement-Security-Report.pdf
3“Affordability Calculator.” Zillow. https://www.zillow.com/mortgage-calculator/house-affordability/#zmm-calc-help
4“How Closing Works and How Much You’ll Pay.” Zillow. http://www.zillow.com/home-buying-guide/how-much-are-closing-costs/
5“Loan Savings Calculator.” myFICO. Interest rates as of February 2, 2017. http://www.myfico.com/credit-education/calculators/loan-savings-calculator/
6Lewis, Holden. “How to get rid of PMI, or private mortgage insurance.” Bankrate. July 11, 2016. http://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx
7“Is Your Home Older Than Its Years?” House Logic. National Association of Realtors. 2017. https://www.houselogic.com/organize-maintain/home-maintenance-tips/home-maintenance-schedule/