Critical Money Moment: Homebuying

Critical Money Moment: Homebuying

Whether you’re considering buying your starter home, second home, vacation home, or forever home, I’d consider that purchase pretty important. In fact, I’d go so far as to call it a critical money moment. Now we’ve written about critical money moments and homebuying in particular before. But lately, I’ve gotten quite a few questions from renters, like …

I’d like to buy a home, but is it possible for me?

How much should I spend on a home?

How do I know when I can afford to buy a home?

If you’re asking similar questions or wondering whether it makes sense to buy as opposed to renting, read on. In this article, I’ll be focusing on purchasing a primary home and whether it’s time to make the move from renting your residence.

Buying Your Home vs. Renting Your Residence

Let’s begin with the basic costs involved with renting versus buying. The financial parts of the homebuying decision come down to things like …

• • Down payment amount
  • Interest rate
  • Closing costs
  • Monthly mortgage payments
  • Mortgage term
  • Maintenance and repair costs
  • HOA fees 
  • Homeowners insurance
  • Homeownership tax advantages
  • Home equity
  • Housing market performance
  • Utility expenses

Of course, renters will also have some financial items to consider, like …

• • Security deposit
  • Monthly rent
  • HOA fees 
  • Renters insurance
  • Utility expenses

As you can see, the list of considerations for renters is much shorter. When things go wrong, you call your landlord, who foots the plumbing bill or pays to replace the water heater. When it’s your own home, you’re on the hook.

Of course, the decision to buy isn’t always financially motivated. Many people who buy a home that they’ll live in — as opposed to a house they’ll use as an investment property — do it for non-financial reasons. They find a house they love. A place where they want to enjoy family life. A home where they can create memories and carry on traditions. 

But when it comes to the largest purchase you’ll likely make in life, finances are certainly important. I came across a nifty tool this week from The New York Times. It’s included in an article with the perfectly descriptive headline, “Is It Better to Rent or Buy? A Financial Calculator.” 

If you’re facing the critical homebuying money moment, it can be an eye-opener. So give the calculator from The Times a try. It allows you to plug in just about as many variables as you’d like. But I encourage you to stick with “The Basics”: The cost of the home you’d buy compared to your current monthly rent. Enter these to see a quick snapshot of whether it makes sense to buy now or keep renting. 

This can help you put your potential home purchase in perspective. The calculator will show you whether it makes more financial sense to move your plan to buy forward. If it’s not worth the purchase dollars-and-cents-wise, is it worth it to you for non-financial reasons? 

The next step is to see if it’s feasible.

The Homebuying Decision

If you’re now thinking that you’d like to buy, take a peek at Zillow or Redfin listings. Look at two types of homes: Those in your price range and homes that might be more ideal. This might change your stance on the purchase price you entered into the NYT tool, so you might want to head back to that, too. Even if the homes you’re interested in are outside of what you can afford now, the exercise can give you an idea of how much you need to save and what your home purchase timeline might look like. And based on the listing prices you reviewed, it could make more or less financial sense to purchase in the first place. 

If you don’t have the down payment saved or the down payment would wipe out your EFOF (that’s your emergency and future opportunities fund), the timing probably isn’t right. While the standard down payment is 20% of the listing price, there are other options available. Keep in mind that, if you put less than 20% down, you’ll likely be subject to private mortgage insurance (PMI). 

Knowing what your down payment should be, you can determine how much more time you’ll need to save. If you don’t have the down payment saved today, how can you revamp your cash-flow plan? How much could you save on a monthly basis, and how long would it take for you to actually save the amount you’d need to buy a home? At the bare minimum, this should include your down payment, closing costs, and your EFOF. Don’t forget to adjust your EFOF to include the higher costs of homeownership, like homeowners insurance.

Since homes come on and go off of the market so quickly, you might want to pause here if you don’t have the appropriate finances in order.

Now what if you have the down payment saved? 

It’s time to add it to your financial plan to ensure that it makes sense in the long run. So reach out! Let us run a home purchase scenario for you to confirm that it fits into your financial plan and cash-flow plan. After all, you have to be able to afford those monthly mortgage payments and cover home insurance, too! And it might be time for you to start applying for mortgage loans and putting in offers on your dream home before you know it. 

If not, we’ll work with you to get the timing right. Either way, you don’t have to go it alone. It might be your first home purchase, but it’s certainly not the first time we’ve walked through the process alongside our clients.

Bonus: Check out this week’s episode of our podcast, Money & Taxes from Bb to XYZ, where we discuss other critical money moments we’ve faced with our clients.