FORT KNOX, Ky. — Homeownership has often been referred to as “the American dream.”
Owning a home can offer stability and independence, it can expand future options; it is an achievement received through sacrifice and hard work. Forbes calls homeownership “the magic of American opportunity.”
We are so blessed as Americans because no matter who you are, where you came from, or what your financial picture looks like, we live in a land of opportunity where we can achieve success with self-determination through hard work.
Most consumers know spring and summer are peak seasons to sell a home. Many have considered taking advantage of the market’s generosity and low interest rates. For some, buying just makes sense. You are able to achieve the American dream while building long-term wealth into an investment; into your investment.
Buying a home is not the right decision for everyone, however. It may be the American dream, but a bank rate survey found that 44% of homeowners actually regretted their home purchase down the road.
This tells me not everyone did their homework. Many were not financially able to afford a home, were not committed to homeownership, or found the responsibility was too much for their lifestyle. Doing your homework is important in making your purchase a success.
Financial literacy information and resources at “Securing the Financial Frontline” is approved by the Army to assist Soldiers and their Families for decisions such as homeownership. Users can utilize the Home Rent vs. Buy Calculator HERE, which will help weed through the fees, taxes and monthly payments to help you make a decision between options.
As part of PCS Milestone Management, users can find the “5 Rules of Buying a House” handout HERE, along with many other helpful resource information handouts, such as Understanding Credit, Spending Plan Worksheet, Free Credit Monitoring, Military Consumer Protection, and others to assist in your decision making process.
Consider this: There will be major changes in your spending plan, more financial responsibility and definite advantages when making this major purchase. Buying or selling a home can be complicated. It is important to be prepared, create and maintain a plan, and crunch the numbers to know what you can afford.
There are some questions that should asked first before taking the house buying plunge. As you begin this journey, consider your purchase from a financial perspective.
· Is buying a fit for me? Homeownership is not only the largest purchase you will make, it can affect your lifestyle. You may not have the income to do the things you have done in the past without getting into debt. Are you prepared for this?
· What can I afford? What does my cash flow look like? A budget allows you to see your income, expenses and savings goals in one place. It will determine if it is in your best interest to buy. Financial advisors tell us to limit our housing payment to no more than 25% of our take home pay. This would include your principal, interest, property taxes, homeowners insurance and maybe private mortgage insurance, or PMI. Pay attention to what you qualify for; you don’t want to place a massive strain on your budget, especially if your income is not stable.
· Do I have savings for a down payment and closing costs? Calculate costs. There are going to be things you may want to purchase for your home — possibly furniture or appliances — but you don’t want to use all your personal savings (3-6 months expenses) to get them. Don’t be tempted to make impulse purchases that will impact your budget negatively. Also, consider what the prior owner paid for utilities and basic maintenance, and inquire about problems the home has had in the past. What about the surprise or unexpected expenses that pop up from time to time? When you least expect it, something occurs that kicks a dent in your budget. You always want to be prepared.
· What does my credit look like? What is my magic score, and is my score high enough to be considered credit worthy? There may be inaccuracies on your report that need improvement or debt you should consider paying down or paying off first. It is essential that all your bills are paid on time; this is 35% of your credit score. It is also important to keep your credit card balances as low as possible. Avoid closing cards you are no longer using. Closing cards increases the portion of available credit you use.
· What type of home do I want? Do I want to build a new home or buy an existing one? Fixer-upper vs. move-in ready? City vs. rural? Small vs. large? What’s your preference? You should be careful in biting off more than you can chew. Determine what is affordable.
· How much should I set aside for moving expenses? Mymovingreviews.com quoted the average cost of an intrastate, or local, move as $2,300 (based on four movers at $200 an hour). Long distant moves vary, from $4,300 and up, depending the distance. Some choose to call in favors and ask family members or friends help. In most cases, however, there are still costs involved: the truck, blankets, boxes or totes, and packing supplies unless included.
· What will I have to pay to get my existing home in tip-top shape as a homeowner? Certainly you want to get the best bang for your dollar. When the buyer looks at your home, they are looking at specifics before committing to a purchase. These repairs could cause delays or an actual sale. As one writer put it, “Focus on the guts of home improvements.” Consider yourself as the buyer: “What would I do to make this home enticing and eager for me to purchase?” Or maybe you are renting and choose to purchase a home that requires updates or repairs for a “flip.” Do you have the money to cover renovation expenses without digging yourself into a deeper financial hole?
Now let’s examine the advantages and disadvantages of home ownership.
Home Ownership Pros.
· Statistics reveal home ownership is one of the best investment returns.
· It offers stability because the property is yours. There is peace of mind in knowing you will have a stable foundation. You can decorate it any way you like, you can turn the music up loud and dance like a ballerina, or live with furry animals — whatever your heart desires, legally. There are few or no limits or landlord restrictions, depending on what you buy.
· The real estate market frequently changes, but the longer you live in your home, the more equity you will build into it. As you reduce your mortgage monthly, you are building equity. In fact, housing generally appreciates in value with time. Every improvement or renovation that is made most always improves the value of your purchase. And best of all, the greater the appreciation, the larger return on your investment.
· Mortgage interest, property taxes and capital gains exclusions may be tax deductible.
· Selecting the right home and location is key. Naturally, your purchase will be made according to your lifestyle: what you like, and what your budget dictates. Picking the wrong neighborhood could mean paying higher insurance and taxes, Homeowners Association fees, extra repair costs, poor neighbors and possibly high crime rates. In a recent Forbes article, the writer encouraged people to consider what the location will look like in five or 10 years; meaning “Will the neighborhood decline in value? Will city growth impact my location?” In short, analyze current trends in your market before buying or selling.
Home Ownership Cons.
· Obtaining a mortgage can be complicated. It requires responsibility.
· The main factor that determines homeownership is a person’s credit score. The higher your score, the more you qualify for.
· Purchasing requires upfront costs for down-payment and closing fees. Down payments depend on the type of loan for which you apply. Some require as little as 3% down. There are expenses you will pay when you finalize the mortgage — called closing costs. Typically, these average around 2-5% of the loan amount. Sometimes if you ask real nice, the seller will agree to pay a portion of your closing costs, or even all of them.
· You may have to pay private mortgage insurance. To avoid PMI, you should aim at putting 20% down on your purchase price.
· Property taxes and HOA fees are the buyer’s responsibility.
· Problems can ensue when trying to get out of a rental lease before the term ends.
· The homeowner is responsible for operating expenses, such as maintenance and repair costs.
Other important thoughts.
1) If you are selling, get your home stage ready. Changes in appearance may make or break the sale. Obviously, moving is a perfect time to declutter and do a deep cleaning. Get rid of items you no longer need; things you haven’t touched in a while. You want your dwelling to look clutter free, open and inviting. Your goal should be to turn your lodging into a home in which prospective buyers can envision themselves living.
2) Make the most of open houses, if you are selling. Social media allows buyers to do a virtual walk-through, but consider this, if you are buying: you can’t see the nooks and crannies. For instance, did the owner have animals, is there a smell, what condition are the appliances, is there rust in the tub, or a huge crack in the foundation? You certainly want to be aware of things inside and out that could be problematic in the future. The strategy? Rachel Cruze, financial counselor at Ramsey Solutions, stated, “Try to locate the most affordable house in the best neighborhood. You will have more room to build value.”
3) How long will it take for you to sell your existing home, or how long it will take for the seller to move? Delays can be a big problem and may require temporary housing. Where will you go? It’s important to have a plan in place, should this occur. You may have to consider renting a storage unit — which becomes just another added cost to your budget.
4) Discuss specifics with an expert. Although hiring a realtor is optional, working with one can save you time, money and unnecessary frustration. A good agent generally has your best interest in mind and will take the weight off your shoulders in helping you find a home, negotiate the deal, and see the process through to closing. Realtors know what buyers want and, as a result, can guide you accordingly. Their advice could mean the difference in you getting an approved offer within hours as opposed to months. Hiring an agent may cost more in commissions, but it can help take the guesswork out of the picture.
There is no perfect strategy for an investor to consider because we all have our own logic, past experiences and emotions when it comes to buying or selling. Do your homework, though, and tweak the numbers, prepare a checklist and consider all the facts before signing on the dotted line.
For those who have personal financial questions or need assistance in developing their homeownership buying or selling plan, call Army Community Service’s Financial Readiness Program. Financial specialists are available to offer individual financial education and planning needs to the Fort Knox community.
To schedule an appointment, call 502-624-5989.
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