Thinking of Buying Your First Home?
Renting vs. Buying
With interest rates low, many renters are starting to think about purchasing a home of their own. While simple rental cost vs. mortgage cost comparisons can be very attractive, buying a home is a serious commitment, and there are many factors to consider. Here are some important questions to ask yourself before buying your first home.
How long do I plan to live in the home?
Selling a home costs money. If you could potentially have to move in the short term, the value of your home may not have appreciated enough to cover the costs of buying and selling.
The length of time that it will take to cover those costs depends on various economic factors. Average appreciation tends to sit at around 5% per year. In this case, you should plan to stay in your home at least 3–4 years to cover buying and selling costs. The real estate market can be particularly volatile, however, and dramatic swings up and down are not uncommon.
For how long will the home meet my needs?
What features do you require in a home to satisfy your lifestyle now? What will you need five years from now? People tend to remain in homes longer than they initially intend, primarily due to the work and expense associated with moving. Therefore, it is worth considering a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy you for years to come.
How financially healthy and stable am I?
Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? You may be able to find a lender, but if your credit is poor, you will likely pay far more to borrow. It's also vitally important to analyze your income (How much do you make? Do you plan on staying with your current job for many years? Is there room to grow within the company?), your debt (How much do you already owe on your car, credit cards, etc.), and your spending (What are you currently paying every month? Do payments eat up all your income?).
How much am I comfortable paying?
How much mortgage should you borrow? Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought is that you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow.
It is, however, important to stay within YOUR comfort zone. Purchasing a house involves many up-front and ongoing costs, and the stress of worrying about those costs often outweighs the satisfaction that may come from owning a slightly nicer home.
How much loan do I actually qualify for?
To determine how much home you can afford, talk to a lender or go online and use a home affordability calculator. Good mortgage calculators can give you a ballpark range of what you might potentially qualify for, but always be sure to confirm with a lender.
Lenders in today's mortgage market often make loans more customized to individuals' situations, instead of conforming to the more traditional "28/36" rule. The "28/36" rule means that your monthly housing costs shouldn't exceed 28% of your income and your total debt shouldn't exceed 36% of your income. Depending on your assets, credit history, job potential, and other factors, lenders can push the ratios up to 40-60% or higher. It may not be advisable to purchase a home utilizing the higher ratios, but it is important for you to know your options.
Where will the money for the buying transaction come from?
Typically, home buyers need to pay some amount of money up front for a down payment and closing costs. If your credit is decent and you have managed to save 10–20% for a down payment, you will likely appear to be a very good financial risk to a lender and will qualify for a conventional mortgage.
If you don't have the savings for a larger down payment, you have some alternatives. FHA loans require as little as a 3.5% down payment, VA loans offer 0% down, and Rural Development Loans are also zero down. Every area of Washtenaw County qualifies for a RDL except for the City of Ann Arbor and the City of Ypsilanti.
What are the ongoing costs of home ownership?
In addition to the price of your home and the interest on your loan, your monthly mortgage payment will also include property taxes and homeowners insurance. However, these aren't the only expenses of ownership. You'll need to remember the additional expenses for regular maintenance, for repairs, and for any improvements you undertake. If you buy a condo or townhouse, a monthly homeowner's association or maintenance fee may also be required.
Still Have Questions About Buying a Home in Washtenaw County?
If you are still unsure if you should buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals. Talk with a local Realtor to learn more about the specifics of buying a home in Washtenaw County.
Want to learn more about buying a home around Ann Arbor? We've got plenty of tools and resources to help you explore the area, learn the ins and outs of buying a home, and even start searching homes for sale. And if you'd like to speak with us about buying a home in Washtenaw County, please feel free to contact us!