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Fiscal Preparation for Home Ownership

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Fiscal Preparation for Home ownership

When I was in my early twenties and had just moved to Murfreesboro, TN for my job, I had a decision to make regarding where to live. I could spend $900/month on a nice studio apartment with a pool and little responsibility, or I could really buckle down on my finances and save for a down payment on a house. To everyone thinking about buying a house, especially millennials, it is possible, but it takes sacrifice – for a short period of time. For eight months, I scraped together every spare dollar I had.  I lived frugally, packed my lunch instead of going out to eat, and said no to a few vacation opportunities. It was one the best financial decisions I’ve made and it set me up for financial success over the next decade. Now each month, my mortgage payment goes towards equity, not in my land lords pocket, and that equity has increased 40% with the robust housing market the past four years.

This is what I learned from personal experience on mortgages:

1) Financial Preparation - If you want to get a low interest rate, which means that you pay the least amount of interest over time, you need to get your financial house in order. Check your credit score.  Higher scores generally mean a better rate. Credit Scores are kind of strange, because they are based on your ability to pay back debt. This is a reason to responsibly hold credit cards, because if used properly, they increase your credit score. Lenders also take your investments, bank balance, debt and income into consideration when qualifying you for a mortgage.

2) Down payments - A 20% down payment used to be required for most mortgages.  Today, you can put down as low as 3.5% with FHA, even lower with a VA loan.  There are pros and cons to putting down 3.5% vs. 10% or even 20%, but it is dependent upon your personal financial situation. Yes, a lower down payment means that you pay more interest over the span of the loan, but you also don’t want to go broke trying to scrape together a larger down payment. If you have the time and resources to save for a 20% down payment, you will also avoid Private Mortgage Interest (PMI) being tacked onto your loan.

3) Closing Costs - When calculating how much money to save for your home, make sure to budget in closing costs! Closing Costs can be anywhere from 2-5% of the price of the home. You will be shocked if you don’t account for closing costs when determining how much to save for a home. My advice is to choose your price range, ex. $200,000, and work backwards using an online calculator to try to estimate what you need to save for the down payment.

Try this calculator:

Example: Let’s say you want to buy a $200,000 home and put down 5%. Your down payment would be $10,000 and estimated closing costs $10,000. You have to come to closing with $20,000. If you are married, you and your spouse could each save $416/month or $104/week for 2 year to save the entire amount.

In conclusion, work backwards and break down your long term goals into short-term steps. As a financial advisor, I can help you with the saving money part, but when the time comes, a trust worthy lender and real estate agent are really helpful in ironing out the details and finding the right fit for you.

Disclosure: For illustrative purposes only, not indicative of all housing markets. Appreciation may vary by location and other factors.