Thinking about home ownership? Terrific! But how do you know when you’re ready to buy a home? There are a number of critical questions you should ask yourself before you take the plunge. And it may not be as simple as saving enough for the down payment (although that is key). It is generally true that a home purchase can put you on track for financial security, however; it also can be a fast track to debt and lifestyle stress. It makes sense to do a little legwork to understand if the time is right for you and how the market conditions meet your particular needs. Read on to get a good overview of the important issues to consider.
1. Am I ready to settle down?
Perhaps you just got married or are expecting a first child. Those are legitimate reasons to want to purchase a home. But think it through a little more. Do you plan on staying in your home for at least five years—that is the recommended time frame to break even on transactional costs and allow your home to appreciate (and build equity) given a stable economy. But also consider your income source. Are you on a two-year contract that could disappear? Do you plan on moving cities and changing careers in the near future? Instability in income could cause huge problems.
If you end up buying and selling a home in a short time period, such as two years, you most likely won’t even cover the closing costs you paid to buy and sell the home in the home sales. Closing costs are estimated at 4% for buyers and 6% for sellers (of the total home cost.) Let’s look at that a little closer. As of January 2020, the median home cost in Santa Fe County was $460,000—the highest median on record according to the Santa Fe New Mexican. Meanwhile, the median home cost for a single-family home in Albuquerque as of January 2020 was $222,500, according to the Greater Albuquerque Association of REALTORS. These numbers translate to closing costs of approximately $46,000 ($18,400 when buying plus $27,600 when selling) in Santa Fe County and $22,250 ($8,900 when buying plus $13,350 when selling) in Albuquerque.
2. Am I better off renting or buying?
Take the time to crunch the numbers a little more. In some markets, it makes sense to buy a home from a financial perspective. In others, renting comes out ahead. This is certainly related to the first question—but offers revealing financial input to consider. Investigate your local market. Be realistic about the costs of renting versus buying similar homes. For instance, get a good feel for how much the sales price is for a three-bedroom home, then search out the costs (if you don’t already know) of renting the same square footage in a similar area. Then do the comparisons. Here is one free online rent versus buy calculator from online financial resource NerdWallet. And then consider the flexibility and financial advantages and disadvantages attached to either option.
3. Where do I want to live?
Think about this in specifics. Zero in on a few areas that you want to investigate and learn as much as you can about the neighborhood. For example, is it safe? You can find resources for crime statistics as well as police reports online, and it is a good idea to also speak with locals. Do you want to be in a quiet spot in the country or do you prefer quick access to stores and restaurants? What about access to parks, nearby schools, and other families nearby? How long will it take you to commute? There is a lot to think about, right? It is a good idea to drive around the neighborhood at different times of the day to see what it is like. Also, local Realtors are a great source of information. Take advantage of their insider knowledge to really dig down on the neighborhoods you are considering.
4. How are my finances?
No surprise that this is on the list. First and foremost, find out your credit score. Why? Because, how high (or low) your credit score is will determine what sort of rates you can expect to get on the mortgage. In order to get a great (lowest) loan rate, you need to show that you are “creditworthy.” Wondering what that means? Creditworthiness is linked to a number called your FICO score (ranges from 300 to 850), which corresponds to a number of variables including your payment history, your spending limits versus debts, length of credit history, new credit, and credit types used. Basically, the credit bureaus who calculate your FICO score want to know that you make your payments on time, don’t max out your credit limits, have credit accounts for some time, and aren’t applying for credit too often—this raises red flags. When you apply for a mortgage you need to know your FICO score and take efforts to raise it if possible. You are entitled to a free credit report annually from the three major credit bureaus—Equifax, Experian, and TransUnion. They all calculate your scores a little differently, but they should all be in the same ballpark. You can also keep an eye on your credit score with one of the free credit monitoring apps that are now available for your phone – you can check it every day and see what progress you’re making!
Here is another thing to think about: How easy will it be for you to pay for home repairs? If the water heater breaks or you need a new washer—you need to take care of them ASAP. There is a wide variety of information regarding how much the average American homeowner pays in annual home repairs—ranging from $1,105 (Home Advisor) to $4,958 (The Motley Fool). But a good rule of thumb is to anticipate spending 1% of your home’s value on home repairs every year. For the Albuquerque average home value mentioned previously ($222,500), you would need to set aside $2,250 annually. And this is barring any major home repairs. Replacing a roof, for instance, could set you back $10,000. Could you handle putting aside 1% of your home’s value for home repairs? And if you don’t use it all each year—you need to be disciplined to keep your hands off it in order to save it for that eventual major home repair.
5. Do I have the down payment saved?
Your down payment is most likely the largest investment you will ever make. One simple way to estimate how much you’ll need to save is to use State ECU’s Mortgage calculator. Most home buyers are encouraged to put down 20% of the cost of the home in order to avoid paying private mortgage insurance (PMI). So for our $222,500 home cost average (in ABQ) home buyers would need to save up 20% of the total home cost, which is $44,500. Now undoubtedly many home buyers can’t swing that total down payment, which is why there is PMI. PMI fees vary depending on the size of the down payment and your credit score. PMI typically ranges from around 0.3% to about 1.5% of the original loan amount per year. For example, imagine that homeowners put down 10% on a $200,000 casa, at a PMI rate of 0.41% annually, the homeowner must also pay $61.50 in addition to their mortgage, taxes, and homeowner’s insurance. You can avoid PMI with some State ECU Mortgages, so be sure to learn your options with State ECU.
And speaking of taxes and homeowner’s insurance—you need to build that cost into your plan as well. Usually, a mortgage lender sets up an “escrow” account for you, which just means they hold money and pay it out on your behalf. The money in this account is for your payments for property taxes and homeowner’s insurance. So your complete “mortgage” payment actually includes your mortgage, plus property taxes and home insurance. (Again do your research in the area you want to buy a home to get an idea of those associated costs.)
Do you understand how closing costs associated with your home purchase and real estate transaction work? These are fees at the closing point when the title of the property is transferred from the seller to the buyer. As mentioned previously, closing costs for buyers typically run about 4% of the home purchase price.
It is a good idea to get educated on the types of mortgages that may be available to you. For many, a conventional, fixed rate 30-year mortgage makes the most sense. But there are variations available such as a VA loan (Department of Veteran Affairs) or FHA loan (Federal Housing Administration) that requires much less upfront for a home purchase and has various eligibility requirements.
Ready to take the next step? Local mortgage support is a huge help
The mortgage lenders at State ECU think it is important that home loans be locally serviced—after all, shouldn’t your payment and your home be in the same place? State ECU now offers a 30-year, fixed-rate mortgage. But they also offer in-house custom mortgage products that offer more flexibility than traditional mortgages. For instance, some plans only require a 5% down payment on a home purchase price, with minimal closing costs. If you are in the market for a home or want a better rate on your current mortgage, be sure to talk with State ECU. To set up an appointment to speak with a mortgage professional on staff at State ECU, please call 505-954-3474, stop by a local State ECU branch, or apply online at secunm.org.
Buying a home is exciting. And for most people, it is a wonderful experience. However, as with anything this complicated and costly, doing the legwork is the best way to make smart decisions. Remember, it is better to wait until you are on solid financial footing (if need be) than getting in over your head. Good luck with your house hunting!