8 Questions to Ask When Purchasing a Home
Buying a home is a big decision that should not be taken lightly. Jumping in without thinking through all of the implications can lead to regret and financial struggles. If you’re considering making the plunge, we’re here to help. Here are eight questions to consider before getting in over your head.
1. What are the real costs?
When shopping for houses, most people just ask what their mortgage payment will be. What’s the principal and interest? Some websites are helpful and add in other typical costs, such as property taxes, homeowners insurance, and private mortgage insurance (PMI) to help buyers come up with a more accurate monthly cost than just principal and interest. But there’s so much more to it. You also need to think about utilities and maintenance, which can vary widely depending on the type, age, and location of the home you purchase.
Beyond that, the real costs also include things such as commuting and lifestyle. If you’ll be driving much further to work, you will spend more on gas, car maintenance, and repairs, and will likely need to replace your vehicle even sooner. Lifestyle is one of the most overlooked costs that comes with home ownership. The neighborhood you choose to live in will influence the cars you drive, how you maintain your house and yard, and even the activities that you and your kids participate in. Before moving to a neighborhood, make sure you’re aware of the lifestyle expectations you will face by living there.
2. Will you want to make changes?
Is the house you’re looking at move-in ready or do you want to make some changes? In 2022, the median amount Americans spent on home renovations was $22,000, up from $14,000 in 2018. Both the cost of labor and materials have gone up lately, so renovations are not cheap, even if you do them yourself.
Before falling in love with a house that needs renovations, make sure that you have the finances to complete them. Be realistic in your analysis as well. A 2020 study found that one in three renovations go over budget. If you do make improvements to your home, make sure you track them as they increase your cost basis, which can matter if you stay in the home awhile and the value increases.
3. Will the purchase impact your ability to save for other goals?
Everything you say yes to is a no to something else. That’s called opportunity cost. What did you have to give up to get what you have? Increasing your housing costs may mean you have to cut back on your retirement savings, the money you have to travel, or other goals. Before committing to anything, make sure you prioritize your goals and understand the tradeoffs involved. Is it worth it to you to work more hours or retire later to have this house?
4. Are you eligible for a mortgage?
This may seem like a simple question, but lenders aren’t as open-handed as they once were. If you are retired and don’t have earned income, then it can be more challenging because you have to show that you have enough assets to support paying back a mortgage. Having a low credit score or high debt compared to your income can also impact your ability to get a mortgage. In some situations, you’re better off putting off trying to purchase a home and instead focusing on paying down debt, increasing your income, and increasing your credit score.
5. Do you have enough cash for closing costs and moving expenses?
Purchasing a home requires more cash upfront than just your down payment. Closing costs can be 3% to 6% of your loan amount. While sometimes you can get a seller to help cover closing costs, there’s no guarantee that you will be able to.
Moving is another big upfront expense. Some of our clients that have moved recently ended up paying almost twice what they anticipated for professional help. Make sure you have enough money in the bank to get your stuff moved into your beautiful new home!
6. Will your need for life insurance change?
Life insurance is commonly considered a way to replace income when someone passes away. However, another great use is to pay off debt to ease the financial burden of those left behind. If you take out a large mortgage, you may want to increase your life insurance coverage so that it could be paid off if anything happened to you. Even if you don’t pay off the mortgage, your monthly expenses will be higher, which increases your need for insurance.
7. Will this purchase affect your estate planning?
You may need to update your estate plan when you purchase a home. In many states, it’s highly recommended to hold a home in a revocable living trust in order to avoid probate. You may want to set up a trust if you live in one of those states and don’t have one yet. Even if you already have a trust, you may want to purchase the house in the name of your trust instead of your own name to avoid having to transfer it later. Estate law is state-specific, so it’s a good idea to consult a local attorney to see how best to update your estate planning in light of your home purchase.
8. Is buying really the best thing to do in your situation?
Buying a home isn’t always better than renting. If you need flexibility and want less responsibility, renting may be a better option. Also, because of the transaction costs involved, you usually have to live in a home for a certain amount of time for it to make sense from a financial standpoint. This blog post provides a more in-depth look at when renting makes more sense than buying.
Hopefully, these questions have gotten you thinking beyond just the principal and interest payments for a new home. Purchasing a home affects your finances in a multitude of ways and it’s important to recognize and consider them. Making an educated decision regarding purchasing a home can spell the difference between a stress-filled and an enjoyable experience.
If you’re considering purchasing a home and want to see how it fits into your overall financial picture, we would be happy to help. We offer one-time meetings where we could analyze just your purchase decision and we also create comprehensive financial plans where we can look at how it fits into the big picture of your overall finances. To learn more about the services we offer, schedule a free introductory call today.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion for helping people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.