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Buying a home may be one of the most important decisions you make, and will likely be the single biggest expense in your life.
To that end, we recommend asking yourself these 10 important questions before you sign on the dotted line and officially become a homeowner — whether it’s your first time, or you have already closed on a property before.
What’s My Budget?
This is the most important question to ask yourself before even beginning the home-buying process. Determining your budget should not, however, be based only on the price of the property. Mortgage payments will not be the only expense you are responsible for: there will be taxes, utilities, maintenance and repair, and other expenses like, in some cases, homeowner association fees.
As Lindsay Martinez, owner and financial planner at Xennial Planning, told us, “be realistic.” Do your due diligence beforehand, so you are not surprised when those expenses are due.
Am I Ready to Buy a Home?
“Don’t buy a home in the heat of the moment that you haven’t planned for, because you could put yourself in a financial bind,” says Travis Gatzemeier, a certified financial planner at Kinetix Financial Planning. That’s one of the most common mistakes he’s seen clients and friends make, Gatzemeier says.
Many people are drawn to thinking it’s a good time to buy a home because of the current low interest rates, or societal pressure due to their age.
Avoid this mindset, he says, and ask yourself if you can reasonably afford a house.
“Do not buy a home just because you think interest rates are low and people are telling you it’s a good time,” he warns. “People think if you’re renting, you’re throwing away money. But that’s not necessarily the case.”
You should buy only when you have the financial means to do so. And the first thing you should be aware of is that you will need a sizable down payment.
Where Is My Down Payment Coming From?
“If you have to take money out of your savings earmarked for another savings, or you don’t have your emergency fund fully funded to put a down payment on a home, it’s probably not the best time to buy,” Gatzemeier says.
Instead, he recommends that you keep a liquid savings account just for the purpose of making a down payment. If you are saving for something else as well — something happening within the next five years — you can keep that money separated completely in its own savings account.
Am I Buying a Home Because I Think It’s an Investment?
“A lot of people talk themselves into buying a home because it will appreciate in value. If that’s your thought process, you’re putting yourself behind due to hidden costs,” Gatzemeier says.
It’s true that in most cases, if you bought a house decades ago it would be worth more today. But that’s a reductive way of looking at the costs and financial rewards of homeownership, Gatzemeier says: “The value may appreciate, but you’re still putting money into it.”
In other words, buying property is not the only way to make your money grow.
If you’ve determined that buying a house is financially within your means and you are ready to do so, we recommend asking your broker or seller the following questions to get a better sense of the neighborhood and potential added costs.
Don’t overlook the importance of a good school district, even if you don’t have kids. It will add to the resale value.
Are There any HOA Fees Associated With the Property?
HOA fees, or homeowners association fees, are often part of the cost of living in some types of communities, such as condominiums or townhouses. They can cover utilities such as water, gas, and electricity, and even gardening and snow removal.
You will have to pay them as long as you live in a community that charges them, and you can be penalized for not paying. Ask your real estate agent ahead of time if the property comes with those fees and whether they might be raised — for example because the community is adding improvements to common areas — so that you can prepare your monthly budget accordingly, or walk away if the fees put an otherwise affordable purchase out of your reach.
What Is the Maximum Amount the Lender Says I Can Afford?
Just because the lender giving you a mortgage says that you can afford a given amount doesn’t mean you really want to go for that figure.
Gatzemeier cautions that if you’re buying a home at the maximum amount the lender says you can afford, you are likely setting yourself up to be in a tricky financial situation.
“It’s not necessarily the amount that’s going to work within your cash flow,” he says. Instead, calculate what you can comfortably afford, including costs such as utilities, taxes and HOA fees that the lender might not factor in — but you should.
What Are the Property Taxes?
Knowing what the property taxes are will help you assess what you reasonably can afford. You should also find out whether there are property tax abatements in effect, and how long they will last. Abatements can reduce your tax burden significantly, but be aware that taxes may jump once the abatement period ends.
What Are the Schools Like?
Even if you don’t have kids, it’s important to look at the schools because the next buyer may have kids — and this could be a major selling point later on.
“Good schools around the home help keep up the value, and you want the home to maintain its value,” says Gatzemeier.
Are There Any Renovations Needed?
Does the house need a new roof? If it has appliances, do any of them need replacing?
Ask about these potential costs before you close, as you may need to incorporate them into your budget and overall financial plan.
How Much Are the Closing Costs?
In addition to the down payment, expect to pay closing costs such as taxes, origination fees and administrative fees when you eventually close on the house. You may be able to negotiate with the seller as to who pays what share of the costs, but you should know before the closing what the costs associated with it will be.