Are You Ready Financially For Homeownership?

Home ownership is one of the longstanding, time-tested pillars of personal wealth. But considering the current market landscape – headlined by a historical rise in real estate appreciation over recent years and mortgage interest rates at their highest point in 20+ years – is buying, as opposed to renting, always the smarter financial decision?

Make Sure You Are Ready For Phantom Costs

Most people are quick to compare the monthly payments of renting vs. buying when determining the affordability of housing options. However, prospective first-time home buyers that stop there are leaving many additional, and oftentimes expensive, costs unconsidered. Ramit Sethi, a financial advisor and the host of Netflix’s How to Get Rich, dubs these extra costs of homeownership ‘phantom costs.’ Why? Because these costs aren’t always present on the monthly mortgage statement and are liable to give you a shock if you let them sneak up on you.

Property Taxes Can Catch People Off Guard Sometimes

As a homeowner, you’ll need to pay property taxes. These taxes are generally levied by the governing county wherein the property is located and the annual amount to be paid is based on the assessed value of the property. A good rule-of-thumb is to multiply a home’s value by 1% to calculate a ballpark approximation on annual dues.

Want to save yourself the headache of keeping track of another bill? Establishing an escrow account with your mortgage lender will enable you to bundle your property tax and mortgage payments. And instead of needing to budget for a hefty bulk payment when the tax bill arrives, you’ll have broken the annual total into more reasonable monthly installments.  

You Might Not Know That Most Banks Require Homeowners Insurance

This one shouldn’t come as too much of a surprise, as most banks and mortgage lenders will require proof of an established policy before allowing you to close on your loan. Additionally, the default option for most folks is to bundle their insurance premium payment, like property taxes, with their mortgage. Nevertheless, it’s important to keep in mind that the cost to insure your home is subject to annual adjustments that often rise and fall with property valuations.

It’s also important to be cognizant of what your policy does and does not cover. Most basic policies do not over any coverage for “acts of God” events like floods and earthquakes. So, while you may be fine not ponying up for the extra insurance if you live in a state not as prone for natural disasters, it may be a more prudent decision, albeit more expensive, in a state like Louisiana, for example, with the highest percentage of land at risk of flooding.

Home Maintenance Costs Can Come At Any Time, So You Should Be Prepared

When renting, it’s easy to underappreciate the ease, and generally free-of-charge, process of submitting a maintenance ticket to request a plumber swing by to relieve a clogged drain or an electrician come out to repair a faulty outlet. However, as a property owner, these problems, and the associated costs of fixing them, fall at your feet. To ensure you’ve adequately budgeted for any unexpected repairs, most financial advisors will suggest setting aside one to four percent of your home’s value each year for maintenance-related expenses.

Is Buying A Home the Right Decision for You?

Homeownership is often more than an investment for most people. For many, there’s a real sense of pride and accomplishment when you’re handed the keys to your first home. However, whether real estate is the best allocation of your hard-earned dollars can and should be treated just like any other investment decision. Keep in mind that rent is the maximum you will pay, but a mortgage is the minimum you will pay. So, before you buy, run the numbers to make sure you can afford it.

Seeking some additional guidance? Connect with an advisor at Fortis Financial Group for a detailed and fully personalized review of your unique situation.