Owning a Home: What You Need to Know

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Owning a Home: What You Need to Know

There is so much to know about owning a home that there are special classes offered by city organizations, colleges, and financial institutions. If there is one in your area, you should sign up for it, as there is a lot to prepare for. Here are some big questions to consider:

How long do you plan to stay?

Since you will be spending a lot of money on various closing costs (see list below) and since it takes some time for the home to appreciate in value, you want to live there long enough to recoup your costs. Most experts say that if you want to buy, you should plan to stay in the home for at least five years.

Can you afford it?

Consider what you can afford to spend:

• How much of a monthly payment can you afford? The rule of thumb for monthly payments is that they shouldn’t exceed 30% of your monthly gross income.
• What savings do you have available for a down payment? Down payments range from nothing to 20%, with most buyers falling in between.
• How do I plan to cover other expenses such as the closing costs? Have you saved up money for them?

Your total housing costs (which will include insurance and maintenance) shouldn’t consume more than 32% of your gross monthly income.

What are the costs?

The home itself is the biggest cost, but there are many others:

• Earnest money. To secure the price that you have settled on, you will make a non-refundable payment to the seller called earnest money. This amount will be deducted from the amounts paid when the sale is completed.
• Real estate attorney fees. If you have an attorney help with negotiations and paperwork, there will be attorney fees.
• Recording fee. This is for recording the new deed to your home.
• Property taxes. You will need to make a deposit for real estate taxes. However, if you live and work on land held in trust by the federal government, you do not pay property taxes.
• Appraisal. The home will need to be appraised, and there is a fee for this.
• Title insurance. This insurance protects you and your lender in case you discover afterward that someone else could lay claim to the house.
• Broker/agent costs. If you have a broker or agent help you find the home and walk you through the process, there may be some fees for that.
• Homeowner insurance. This insurance protects your home and its contents.
• Mortgage insurance. If your down payment is less than 20% of the price of the home, you will likely have to pay for mortgage insurance. This insurance protects the lender who loaned you the money to buy the home in case you default on your payments.
• Inspection. If you want the home inspected, there will be a fee.
• Loan origination fee. This is an up-front fee charged by your lender to process your loan application.
• Credit report fee. You might be charged if your lender pulls your credit report.
• Points. Points are fees you pay to the lender in exchange for a reduced interest rate. A point is 1% of the mortgage amount.
• Other fees. Various other fees may apply, most of them voluntary. For example, you might want to pay a locksmith to change the locks on the doors.

How to prepare for the costs

The list of costs involved in buying a home can be intimidating. On average, these costs will be 2–6% of the amount of your mortgage. It is a good idea to start saving up for them as soon as you can. Set aside a special account at a financial institution and start adding to it regularly. Make sure this amount is a part of your budget if you decide you want to buy a home.

So … should you own or rent?

The ultimate answer to this question will be which option you are most comfortable with and ready for. It might be renting for now but owning in the future—or vice versa. Do you feel ready for the responsibilities that each option requires of you? Do you feel ready to meet the financial demands?

One way to help decide is to compare the costs of each. That way you can start planning and setting aside money early on. There are online calculators that can give you some helpful estimates.