With the real estate market slowing down, it may finally be time to buy that dream home. But be careful not to over-buy. Many experts agree that you should only purchase if you plan on staying in the house for at least five years. Make a habit of keeping all manuals and documentation for appliances and home systems in a convenient place. A hot water warranty or a home warranty in general will help with the cost of repairs.
- Set a Budget
Whether you live in an apartment or with your parents, it may be easier to be a little loosey-goosey when it comes to budgeting. But when you own a home, things change. That’s why it’s so important to take time to create a home buying budget, one that includes all of the costs and expenses that come along with homeownership.
The first step in creating a home buying budget is to determine how much you can afford. To do this, start by creating a spreadsheet that lists your monthly spending categories and their amounts (for example, food, transportation and housing). Then add in any other major expenses you have each month, such as the cost of an iced coffee in the morning or your monthly back massage.
Be sure to include your mortgage payment in the calculation, along with any other PITI components like homeowners insurance and property taxes. It’s also a good idea to make sure you account for any other expenses, such as utilities and maintenance, that will be unique to your new home.
- Look for a Reverse Mortgage
A reverse mortgage allows older homeowners to use their home equity to supplement retirement income. This type of loan does not require any payments for as long as you live in your home and the balance is only repaid when you sell the property, permanently move out or die.
Reverse mortgages are a big financial decision and should be considered carefully. Before you apply, consult a qualified financial advisor to help you weigh the pros and cons.
Typically, borrowers must be age 62 or older and meet initial debt-to-equity requirements. In addition, you must submit a financial assessment. Lenders check your credit reports to see payment history on mortgages, revolving debt and other loans, as well as collection, charge-offs, judgments and delinquent federal debt. You must also remain current on your home taxes and homeowners insurance. Otherwise, your county tax authority can put a lien on your home and sell it to recoup property taxes owed.
- Look for a Home Equity Line of Credit
Think of a home equity line of credit (HELOC) as part loan and part credit card. Generally, lenders only offer HELOCs to homeowners who have built up enough equity in their homes. Lenders will consider your home’s current value, how much you still owe on your mortgage and your debt-to-income ratio when evaluating your eligibility.
The good news is that if you qualify for a HELOC, you can borrow against your equity to fund many different projects. For instance, you can finance a kitchen remodel, new bathroom or a vacation. Plus, the money you invest in your house will add to its resale value.
Keep in mind, however, that a HELOC will come with closing fees. These include administrative, credit service, flood certification and document prep fees, in addition to the interest charged on your home equity loan. You may be able to reduce the amount you pay in closing costs by building up your credit score, reducing your monthly debt and shopping for the lender with the lowest closing fees.
- Consider Rent-to-Own
If you’re not ready to buy a home yet, work toward improving your credit score, paying off debt and saving money for a down payment instead of signing a rent-to-own contract. You could change your mind, lose your job, or run into financial trouble that would prevent you from qualifying for a mortgage. If you do end up walking away from your contract, you might lose thousands in rent payments that you won’t be able to recover.
In a rent-to-own contract, you and the seller agree to a lease term that gives you an option to purchase the home when the lease ends. In most cases, you’ll pay a nonrefundable fee up front that’s often called an option money or option fee to show the seller you’re serious about purchasing the home. Then, you’ll typically make monthly payments that will go toward the purchase price of the property and help build equity over time. However, you’ll also have to factor in additional expenses like homeowner’s insurance and utilities.