Few life events are more confusing and intimidating than purchasing your first home. And rightfully so — graduating from paying rent to keeping up on a mortgage is terrifying. But buying a house or condo can be a great investment, and becoming a homeowner has its perks.
The road to homeownership is wrought with challenges and tough choices. But I’m here to offer up some common mistakes, and share how you can avoid them.
DON’T deplete your savings
If you think the costs that precede your closing are expensive, just wait. Your first year in a home, you’ll likely spend big money on furniture, repairs, tools and equipment (remember, you’ll need a lawnmower now!), and more repairs. And unless you have money stashed away to cover the costs, you could find yourself house poor and buried in credit card debt.
When budgeting for a home, be sure to round up your estimates of the property’s final price tag. Factor in inspection and appraisal fees, closing costs, deposits for utilities, homeowner’s insurance costs/property taxes if not paying via escrow, and moving costs. Then be sure you’ll have at least three months (six months is preferable) worth of expenses saved to cover initial home costs. The worst thing you can do is move into a house without a safety net, only to find out, too late, that your expenses are unmanageable.
DON’T give notice too soon
A lot can go wrong from the initial offer to the closing. Namely, your financing. As a first-time homebuyer, often with less credit than older borrowers, lenders are wary of whether you can be trusted to pay the loan. And horrifyingly enough, they can pull out of the deal at the last minute, leaving you with no means to purchase the home you so desire.
Although you can’t control how your lender behaves, you can have a backup plan. Don’t give notice at your current apartment until you have the keys to your new home in hand. It may seem wasteful to pay an extra month or two of rent at your current place, but avoiding giving notice will ensure you’re not left out in the cold if your closing gets bumped back a few weeks. Besides, if you keep your place longer, you can take your time moving in to your new home.
DON’T count on your co-borrower to stick around
Whether you’re buying a home with your spouse, partner, or a close friend, you should draw up a contract about what happens to the property, should you choose to part ways. Hopefully, you’ll never need this agreement, and you’ll sail off into the sunset together toward a lifetime of bliss. But in case you split with your co-borrower, you must be prepared to sell or refinance the home, and it’s best to make tough choices together before you hate one another.
Decide which party will remain in the house, or whether you would sell in the event of a split. Keep in mind that you may end up owing money on the home if forced to sell hastily. Agree on how you will split the equity that exists in the home at the time you sell or refinance. Sign on the dotted line, stuff the contract in a drawer somewhere, and forget about it. Until you need it, that is.
DON’T pay the minimum balance
You might be surprised to learn that for several years after you purchase a home, most of the mortgage you pay is funneled toward loan interest In fact, some homeowners barely make a dent in the principle balance of their loan over the course of several years.
That’s why it’s essential to pay extra toward the principle of the loan gradually throughout the year. You’ll hardly miss an extra $50 per month, but that sum will pay down the loan faster, and save you thousands on interest over the life of your loan.
What do you wish you had known before buying your first home? Tell me in the comments!