Thursday, September 21, 2006

Reflections on Home Ownership

I am of the age where many friends and acquaintances are buying their first home—some of whom are single. I took the first leap in home ownership myself in the summer of 2004, and again in the spring of 2005. I am certainly not an expert in home ownership, but I am probably more experienced than many my same age. I have purchased two homes and sold one of them, so I have seen all sides of home ownership. Every time I hear of a friend buying a home, I get excited, but I also cringe at the uncertainties they are getting into.

Once my first house was listed for sale I felt obligated to share my home ownership experiences with others to ensure all facts are known and to avoid mistakes. Home ownership is never a simple thing. The first time home buyer can be lulled into thinking that it can’t be that different than renting—but the two are incomparable.

Before buying a house, especially singles, ask yourself these questions:

Are you ready for a mortgage?

Most first time home buyers do not have money for a down payment and must finance the entire cost of the home. This is not necessarily bad, but it does increase the risk when selling the house. Selling a home isn’t just a matter of giving two months notice. It costs money—a lot of it. Selling fees without an agent commission will be two to three thousand dollars, depending on the value of the house. Using a real estate agent to sell the house will cost another four to seven percent of the sale price of the house.

A house payment almost always costs more money than renting when you include things like taxes, insurance, and association dues if applicable.

What is the minimum amount of time you’ll own the property?

Those not committed to owning the house for more than a few years take upon great risk when buying a home. Financing the entire cost of the house, interest only mortgages, or worse—both will increase risk significantly. Mortgage payments are front-loaded with interest payments. This means that after five years paying a mortgage, one will have paid five times as much in interest as principal.

For example, after two years of mortgage payments on a $200,000 mortgage will only net approximately $10,000 in equity, depending on interest rates. If the housing market is stagnant or declines over those two years, selling the house could cost a great deal of money.

Beware of Adjustable Rate (ARM) and Interest Only Mortgages!

Adjustable rate mortgages offer the buyer more flexibility in buying a more expensive house than could be afforded on a fixed 30 year mortgage. But once the fixed term is over, the rate will likely go up—along with the cost of the mortgage.

Interest only mortgages are even more speculative and risky. Selling a home with no equity leaves the seller in a position where the home needs to sell for more money to be profitable than a seller with equity stored up.

The two together create an extremely risky endeavor and are to be avoided under most all circumstances.

How much can you afford to pay each month?

How much financial flexibility do you have? Stretching your budget each month to make a mortgage payment is an unwise decision. It will cramp your lifestyle and leave you vulnerable. Renting can be wiser than buying. Save money for a down payment before buying—it will save a great deal of stress and anxiety.

Singles should avoid any situation where one must rely upon rent checks to make a mortgage payment each month. This too will save a lot of anxiety and avoid undue risk.

Can you afford closing costs?

Closing costs will generally cost approximately three percent of the value of the home. This is simply what it costs to have the honor of becoming a home owner. These are all “sunk costs” and cannot be recouped. Wrapping closing costs into the mortgage requires the home appraisal to exceed the value of the mortgage or mortgages. It will also increase the mortgage payment. This means the buyer may have to pay the original closing costs when selling the home, if the sale price does not exceed the purchase price.

Can you do home repairs yourself, or afford to pay someone else?

Are you a handyman? Do you know one? Will that person be willing to help you—perhaps at a moments notice? If not, then be prepared to pay a professional at great expense. Even newer homes can, and will have problems. Be sure to have enough money left over each month to be able to pay to fix any potential problems.


Psyclist said...

I agree with your rundown and think there are a few things to add.

Be conscience of recent referenda as these will affect your taxes. My taxes balooned from $2,400/yr to $6,000/yr because of recently passed referenda and reassessment due to "new construction". Be cautious of buying new contruction because there are no prior tax years to make a qualified estimate to predict future taxes.

Be cautious of your lender. Your lender does not care if you go bankrupt. Their commission is typically based on the size of your loan and their interest in your success and home disappears at closing. Just because you are approved to purchase an expesive home does not mean that you can afford it. Also, imagine you finance the maximum allowed by the lender and you are slapped with a sizable tax increase...not a pretty scenario.

As you stated, you need to be aware of your financial flexibility. Owning a home is a great experience. Just be aware of the motives of those that are part of your transaction (lawer, realtor, lender, developer)

Psyclist said...

Did you have a realtor for your last sale or was it throught your Craiglist post?

John said...

We sold the house using Eagle Realty.

Eagle Realty will work with a buyer that the seller finds independently. They will take only a 1% commission rather than their already low 3.99% commission.

We did post the house on Craig's List and found a buyer that way. Thus we had thousands more dollars to work with for our counter-offer.