More people may be renting a home than ever before, but owning a home is still part of the American Dream that many of us aspire to achieve. Browsing real estate listings and attending open houses might seem easy enough, but the price isn’t the only thing you should consider when buying a home.
From down payments and mortgages to neighborhoods and schools, be sure to put some serious thought toward these five things before you put in an offer.
1. The size of your down payment
You love your parents and (sometimes) cherish their advice, but let’s face it: They grew up in a different time. That whole idea about needing a 20% down payment to buy a home? It’s a myth.
When purchasing a home, you have several low-interest loans that don’t require 20% down, including options through the Federal Housing Administration (FHA) and other breaks for first-time homebuyers and those who purchase land in rural areas.
Where the 20% rule does come into play, however, is mortgage insurance. Those who don’t reach that threshold are required to purchase private mortgage insurance (PMI), which protects the lender in case you default.
A larger down payment definitely helps lower the total interest you pay back to your lender. But the thinking that you need to make a 20% down payment shouldn’t stop your search before it even begins.
Pro tip: If you plan to buy a home sooner rather than later, you might want to mitigate risk and keep your down payment funds in cash rather than stocks. Ally Bank offers several options, including an Online Savings Account and several Certificates of Deposit (CDs) — both earn competitive interest rates.
2. How much house you can actually afford
Your monthly mortgage payment is only part of the expense of buying a home. To determine your home buying budget, take into consideration home inspection fees and closing costs, which typically are 2 to 5% of the purchase price.
And looking ahead, you should also think about all the other expenses that come along with owning a home, including property taxes, homeowners insurance, homeowners association (HOA) fees, property maintenance, and the costs of any major repairs or renovations you need to make.
You should also consider any outstanding debt you may have, like student loans, revolving credit-card debt, or a car loan when calculating how much you can afford to pay for a home.
Pro tip: The days of calling your landlord are over. Once you’re a homeowner, every leaky faucet and broken A/C compressor is your responsibility. These costs can quickly add up. Rather than charge your credit card (and potentially pay a high interest rate), start an emergency fund so you’re financially ready for any unexpected money emergency. A good rule of thumb is to have three to six months worth of living expenses saved.
3. Family matters
Despite your dad’s political beliefs and your mother-in-law’s constant questions, chances are you really do love your family … most of the time. But how close do you want to live to them? Check out this recent Ally survey, where we found that 57% of respondents prefer to live within 15 to 45 minutes of their parents and/or in-laws.
4. How you’re going to pay for it
If you’re only paying cash for a percentage of your home, the rest of the money has to come from somewhere, right? That’s where mortgage lenders like Ally Bank come in.
Taking your credit history and financial goals into consideration, as well as what type of mortgage you are interested in (fixed rate or adjustable? 10-year, 30-year, or somewhere in between?), we will set you up with a loan advisor, loan coordinator, and closing coordinator to help walk you through every step (and document) of the process.
Pro tip: Homes for sale come and go quickly in hot real estate markets, so it’s important to be one step ahead. While being pre-qualified for a mortgage is a good first step, being pre-approved can be better because it indicates that you’re a serious buyer. While some lenders use the terms pre-qualified and pre-approved interchangeably, pre-approved is typically considered the second step in the process.
5. The surrounding area
Some homebuyers prioritize an open floor plan. Others, a finished basement. But the three things all home shoppers have in common? Location, location, location. (That old real estate adage really does ring true.) It’s important for all generations, although 30-somethings focus on that neighborhood vibe more than others.
What matters to you? Is it being close to the city center and/or public transportation? Living near good schools with safe parks? Being near a quality hospital?
Be sure to prioritize your needs and wants so you end up in a location you love. Buying a home is a big financial commitment — and there’s no refund policy.
Buying a home is a major life milestone — and a huge expense. Whether you’re a first-time homebuyer, looking to upgrade, or ready to downsize, it’s essential that you take all the right factors into consideration before you make an offer.
Don’t miss out on the home of your dreams!