Episode 91. What to Consider Before Buying a Home with Ariel Ward
This week I sat down again with Ariel Ward, CFP® to talk about things to think about before buying a home.
Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of this year, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. Ariel is married to a pilot and spends as much time as possible exploring the US with her husband and 2 children. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.
Ariel works virtually out of Charlotte, NC. She enjoys North Carolina’s mountains, beaches and everything in between. In her free time you can catch her walking to one of Charlotte’s excellent breweries, playing Scrabble or building Lego houses with her kids.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
A big decisions we’ve been helping multiple clients with this year
Financial considerations to make before buying a home
The reason people many feel the need to purchase a home
Homeownership costs that might not always increase the value of the home
Where the commission fees play into your financial well being for short term homeownership
How long to plan on staying in a home before selling it
The dangers of buying a home for the maximum amount a lender approved you for
Why you should consider future life milestones when deciding on how much house to buy
Where retirement savings plays into plans for buying house
Some realities of homeownership that aren’t always talked about
Tips for saving for a home down payment
The types of accounts to stash money away into for your initial down payment
A good way to prepare financially if you are considering upsizing your home
The down payment percentage you should be striving for
The way Private Mortgage Insurance can affect your cash flow
How to prioritize big savings goals alongside buying a home
Buying your first home is not only a major life milestone, but it’s also a big financial goal to meet (one that comes with commitment and responsibility). While many consider a home an asset, this investment of your money is a decision to carefully consider before making.
Determine If Buying is Right For You
Look ahead to the next 3-5 years. Where do you see yourself? Do you see yourself getting married, changing careers or moving out of state in the next few years? What about incurring large expenses such as having children or buying a new car? Consider your current job and the stability associated with it. Can you expect to be there for the next few years?
Although you may feel the need to purchase a home now, if you’re facing any big transitions in the 2-3 years ahead, consider renting until the dust settles and you have more stability. While you may be able to sell a home that you purchased just a few years ago, being faced with having to make a quick decision or sale could hurt you financially. Additionally, basing your home buying decision on whether or not you can afford the home on your current salary if you don’t have job security could be problematic.
Finally, if you don’t have a 20% down payment saved up – wait to buy. I know, it’s really tempting to go for it anyways, but getting trapped with Private Mortgage Insurance (PMI) could require a notably higher payment each month than what you have budgeted for. PMI is private mortgage insurance, and it’s designed to protect the lender in case the borrower defaults on their loan. If you show up to the table with less than 20% of the purchase price to put down in cash, the lender will see you as riskier and place PMI on your loan. This is an additional monthly fee on top of everything else that makes up your mortgage payment.
How Do Your Student Loans Impact Your Home Buying Decision?
Buying a home is all about the numbers. One of the biggest numbers your lender will look for is your debt-to-income ratio, which should be 28% or less. In other words, the amount of your income that you spend on debt payments every month should be no more than 28% of your monthly budget.
The more you spend on debt, the more susceptible you are to default on those loans if you lose your job or have an emergency. If you have a lot of student loans, your ratio may be too high to qualify.
The second number is a down payment. Most lenders require some down payment when you buy a home – the traditional number being 20%.
If you’re buying a $600,000 home, saving a $120,000 down payment can seem impossible when you have student loans. Fortunately, there are other options. The Federal Housing Authority has a 3.5% down payment program that’s much easier for borrowers. If you’re a veteran or buying a house in a rural area, you may be able to find 0% down payment loans, but be aware of funding fees and ending up upside down on your home before you even close (i.e. owing more than the home is worth). Plus, keep in mind that the less you put down on a home, the higher your monthly mortgage payment will be and the less you’ll have in cash flow to fund other goals like retirement, travel, entertainment, and college funding.
Know Your Credit Score
Your credit score is an important factor in your ability to qualify for a mortgage and a great interest rate. The higher your credit score, the lower interest rate you’ll qualify for and the more attractive you’ll be to lenders. Making timely payments on your loans and debts can raise your credit score and help you to qualify you for a mortgage. Minimizing consumer debt such as car loans and credit cards can also help in this area.
You can check your credit report through the three major credit bureaus at annualcreditreport.com or your score through a website like creditkarma.com. Some banks and credit card companies also give you access to your credit report for free on your monthly statement.
How Much Home Can You Really Afford?
When narrowing down on a purchase price for your future home, don’t just look at your current budget to determine if your new mortgage amount will work. Also factor in additional home maintenance, HOA and utility costs. If there are plans for growing your family, determine if you can afford child care AND your new mortgage payment. Also evaluate if you’re saving enough for retirement or if you’ll be able to steadily increase the amount you’re setting aside when you make your purchase. Oftentimes people over-commit to the amount they can afford based on what an online calculator tells them, but those calculators don’t factor in real-life situations.
Can you afford to both purchase your home and maintain the property? Whether you’re using a gift, loan from parents or savings to cover the down payment on a home, it’s important to maintain an adequate emergency fund for repairs and to factor items such as monthly maintenance, homeowner’s association dues, property taxes and insurance into your budget. Also be sure to consider if you need to do repairs, paint, purchase furniture, appliances or fixtures, and factor in closing and moving costs into your expenses.
A good rule of thumb to consider is that no more than 28% of your gross monthly income should be used to pay for PITI (principal, interest, taxes and insurance). The good news with a home purchase is that you’ll be locking in a consistent payment each month that won’t be subject to ongoing increases you may have faced with rent.
Saving for a Down Payment
Even a 3.5% down payment on a $200,000 home requires you to save $7,000 – not including any closing costs and fees. And ideally, you’ll be saving at least a 20% down payment to have more manageable monthly payments.
Go through your budget and see where you can cut to save for a down payment. Can you lose the gym membership you’re barely using or the subscription boxes that pile up each month? Can you cut back on eating out until you’ve bought your home? Cutting large expenses can be effective, but sometimes it’s better to make small changes in several areas at once.
Some people also pick up side gigs to pay for their down payment faster. One way to ensure success is to decide how much you need to save every month and then set up automatic transfers into an account established specifically for your down payment at your bank. You can continue doing this after you save your down payment to create a special emergency fund for your new home.
The bottom line is that you can effectively save enough money to purchase a home. However, it’s important to consider factors like your income, the cost of homes in your area, your current life stage, if there are any transitions on the horizon, and where owning a home fits into your overall financial picture. You don’t want to have so much home that you’re not able to save for other important financial goals in your life.
Buying a rental property is an exciting idea. Many popular bloggers, podcasters, and HGTV show hosts make it look so easy – but is it really?
In the world of Pinterest and Fixer Upper, home renovations and rentals seem easier than ever. Unfortunately, that’s not usually the case. The cost of a home renovation and the stress of renting it out to short or long term renters often makes the process a financial (and emotional) loss. Let’s look at what you need to consider before moving forward with a rental property purchase.
#1: Who’s Responsible for Upkeep?
If you’re renting out your property to short-term vacation renters, you’ll need to consider who’s going to clean your property and get it ready for guests in the turnaround time you have between departures and arrivals. If you’re renting out your property to long-term tenants, you still need to have a contractor or maintenance company on-call who can help you take care of the property if something goes wrong. Sometimes, landlords are able to outsource these tasks in an affordable way (but keep in mind, the more you outsource, the more of your profit you’re giving away), which leads us to the next item to consider:
#2: Will You Make a Profit?
This is easily one of your biggest considerations. It’s easy to assume you’ll make a profit when you ballpark the numbers and only look at the best-case-scenario. Don’t do this to yourself. You don’t want to purchase a home under the assumption that you’ll turn a profit by renting it out, only to be surprised by a few unexpected expenses and a slow renting season. Before you buy, do the following:
Evaluate the local rental market
Know what you expect to spend both to purchase the property and to maintain it
Estimate how long it will take you to actually turn a profit or make back what you’ve invested
#3: How Will This Impact Your Taxes?
Being a landlord comes with a different set of tax expectations than just being a traditional homeowner. Make sure you include property tax estimates, as well as income tax on your rental income, in your financial projections. High property taxes could offset any revenue you bring in from the property each year. As a landlord, you also have a set of tax deductions you may be able to take advantage of. While you may have a positive or break-even cash flow situation, by factoring in depreciation, you could have a tax loss each year. Speaking with an accountant and financial planner to understand the numbers and what you need to do to remain organized for filing season is in your best interest.
#4: Do You Have the Right Insurance?
As a landlord, you’ll need to decide what type of insurance coverage you’ll need for your investment property. Although sites like Airbnb and VRBO both have some insurance protection for their hosts, your insurance company could potentially deny you coverage if they find out the property is being used commercially. You’ll also need to weigh the pros and cons of taking on a higher monthly premium that offers you broader coverage as a landlord versus skimping on coverage but having a high deductible. Note: As a financial planner, I’m going to go ahead and tell you to get the landlord insurance. Don’t take unnecessary risks here.
#5: Do You Have an Expanded Emergency Savings?
It’s beneficial to calculate the costs of replacing or repairing a few of your property’s big-ticket components. Think of worst-case-scenarios, then call around for estimates. A few worth looking at are:
Plumbing (nobody wants a burst pipe or an out-of-service toilet, especially if you’re a renter)
Replacing major appliances if they go out
Knowing what some of these costs might be ahead of time can help you to set a reasonable savings goal. That account should be earmarked specifically for rental property expenses to help you avoid going into debt if you’re faced with an emergency.
#6: Are You Emotionally Ready to Be a Landlord?
Most people assume that renting out their property will be easy. In many cases that might be true, but life happens. Sometimes pipes burst in the middle of a holiday. Or your guest tries checking in after their flight lands late at night and can’t find the key. As a landlord or host, you need to be prepared to handle these situations in the moment. In some cases, you might find you can outsource this on-call duty to a property manager, but that’s an added expense you’ll need to keep in mind when deciding if this venture is a worthwhile investment.
Is A Rental Property Right For You?
Truth be told, for most people the answer to this question is a simple no. Rental properties are fairly trendy right now because of the prevalence of organizations like Airbnb and VRBO that make renting your home seem easy. However, for the majority of people, this investment just isn’t one that makes good financial sense. Rental properties can be time consuming, and often are more costly than they’re worth in potential revenue. However, there are a few cases where a rental property might work for you. I always tell clients you need to check four items off your list before moving forward with purchasing a rental property:
1. A financial plan that supports the property purchase and ongoing costs. This means you’ve estimated insurance, taxes, cost for upkeep and cleaning between guests or tenants, costs for updates, a sizable nest egg in case you need to do a major repair, and a down payment that offsets the financial burden of the mortgage.
2. Knowledge of the area. Purchasing a rental home in Hawaii when you’re landlocked in Nebraska probably isn’t in your best interest. It’s better to buy in your local area, or another area where you have a wealth of knowledge about the local real estate and rental market. You need to make sure this investment is going to turn a profit, and that means that property values have to be consistently on the upward trajectory and the rental market hasn’t experienced a slump in a while.
3. A purpose for the home. Do you want a rental home because it sounds like easy money, and you’ll have a cool place to vacation? That’s likely not a good enough reason. Purchasing a rental property means having a long-term strategy for the revenue. Are you using it to reach a savings goal? Or to invest? Are you planning to spend time on the rental property, or is for tenants only? Will the home require a lot of upkeep as the years go on? Do you have a solid exit strategy for when you’re done being a landlord? Having a purpose when purchasing your rental property and knowing your strategy going in is a must.
4. Time. Rental properties are a huge time commitment. The initial search and purchase, renovations to get the property renter-ready, ongoing maintenance, and renter interactions – all of these things are time consuming. I always tell people that if you’re not willing to get up in the middle of the night because someone has called about a pipe bursting in your rental property, you’re not ready to purchase one. Always go into rental property purchases knowing that they’re a time commitment, and make sure the return on your investment is worth the time you’re spending.
Are you considering a rental property? Don’t dive in without knowing whether or not it works for your unique financial situation. Let’s chat about whether a rental property will help you achieve your goals, or if there’s a different and better solution out there.
Episode 57: Paying off Your Mortgage in 2 Years on One Income with Kim Anderson
CAN I TACKLE MY MORTGAGE ON MY SCHEDULE?
This week I sat down with author and thrifty lifestyle blogger, Kim Anderson.
Kim Anderson is the author of Live, Save, Spend, Repeat: The Life You Want with the Money You Have. She’s also a thrifty lifestyle blogger, podcaster and Blogging Coach. She lives in North Carolina with her Youtuber husband, 6 year old son and adorably identical twin baby girls.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
How Kim’s parents influenced her and created a domino effect of becoming debt free in her life.
How Kim’s family celebrated being mortgage-free.
How Kim and her husband made the decision to go from two incomes to one.
Where Kim’s entrepreneurial spirit came from.
How credit card fraud impacted Kim’s life.
Why and how Kim made the transition to a cash based life.
The little things Kim did (and you can do too) to pay off your mortgage sooner.
How a little bit of money can make a big impact on your debt.
The importance of understanding the true amount that you’ll pay for a home (or any debt).
What changed for Kim and her husband once the mortgage was paid off.
How turning your finances into a game can encourage your progress.
What amortization is and how to use it in your situation.
Why teamwork is imperative when paying off a large debt.
How Kim still budgeted for items that brought happiness even while paying down debt.
What to know and consider around your budget before purchasing a home.
Thinking about buying a home? You’re not the only one. With interest rates at opportune levels, many people are anxious to get into the real estate market. However, even if you feel like you’re missing out on a hot opportunity, ensure you have the boxes checked in these five money areas first:1. Max Out Your Emergency Fund
1. Max Out Your Emergency Fund
Are you sitting on $10,000 in cash and considering using that for your down payment? Congrats on the savings! Just consider whether you’ll have funds left if you use that for a down payment.
Having had countless conversations with consumers around the country, I can tell you that using all your saved cash cushion as a down-payment fund wipes out any money you might need in case of emergency home repairs or job loss. And that leaves you reliant on credit cards and debt.
Set aside a minimum of three months of expenses (ideally six) in addition to building your home down-payment fund.
2. Keep Saving for Retirement
Home ownership is a key part of the American dream, but getting to your retirement years in a solvent position is also important.
If you’re looking to purchase a home, make sure the mortgage payment you’re taking on allows you to continue saving for retirement. As your income grows over time and your mortgage payment takes up a reduced percentage of your expenses, you’ll have room to increase your retirement funding.
3. Build a “New Home” Budget
Budgeting may not be very sexy, but it’s smart. Knowing where your money is going before purchasing a home helps you to target areas for adjustment. In addition, knowing your monthly cash flow ins and outs allows you to consider how much home you can truly afford.
Remember, it’s not just about factoring in a mortgage payment. You should also consider:
Homeowners association (HOA) dues
Increased utility costs
Added cost-of-living increases, such as more expensive groceries or gas, depending on where you buy
A general rule of thumb is that your monthly housing payment (principal, interest, taxes, and insurance) shouldn’t take up more than 28% of your income before taxes. This debt-to-income ratio is called your “housing ratio.”
4. Keep Your Debt Under Control
Before even considering purchasing a home, pull a free copy of your credit report from annualcreditreport.com and grab your free credit score (with account sign up) from Credit Karma. You’ll want a good credit score in order to get approved for a low interest rate on your mortgage (which translates into dollars back in your pocket).
Take stock of any outstanding debt you have from credit cards and car loans, etc. This will affect your debt-to-income ratio, which is the total of all your monthly debt obligations plus your housing expenses versus the amount you earn.
Ideally, you want this number to be as low as possible (with a target of 36% or below), although 43% is the highest ratio a borrower can have and still obtain a qualified mortgage. The lower your debt-to-income ratio, the more manageable your payments and the better off your financial picture is.
5. Take Stock of Your Life Plans
If you’re one of the 35% of home buyers age 35 or under, you’re likely going through a significant amount of life change.
Do you plan to start a family and need more space in the next few years?
Is your job stable?
Are you open and willing to move to a new area if given the opportunity?
Are you thinking about getting married or starting a business?
Review your overarching goals and desires to ensure that the home you’re buying and its location align with your long-term objectives. For instance, is there a chance you may turn the home into a rental property? That’s a big case for keeping your mortgage payment low enough that a monthly rent payment could cover your costs.
Purchasing a home can be one of the most exciting times in your life. With a little advance planning, preparation, and thought, it’s an event you can enjoy instead of stress over.
This post was written in partnership with The National Association of Realtors. I have been compensated, but the thoughts and ideas are my own. For additional home finance tips, check out HouseLogic.com.