4 Things Millennials Should Know Before Buying a House
According to National Association of Realtors, one-third of homebuyers during the first quarter of 2014 were millennials. According to NAR Chief Economist Lawrence Yun: “Fixed monthly payments and the long-term financial stability homeownership can provide are attractive to young adults despite them witnessing the housing downturn and subsequent slow recovery in the early years of their adulthood.”
It seems millennials are all set to change the face of the real estate industry in 2015. Tides have been favorable too. Rents are soaring, economy is finally getting on track and there are options of low rate mortgage. And with job market also turning a corner and moving from strength to strength, it’s no surprise that millennials are lured into achieving the big American Dream. Are you a millennial looking to purchase a home but feel little sceptical about the idea? Here is a list of 4 top factors that you should know before buying a house:
1. The total costs of ownership
When you are on rent, you know your costs upfront. But homeownership is altogether a different ball game. Homeownership expenses begin with mortgage and expand with other expenditures that must be taken into account, for example hidden fees at the time of closing, utilities, maintenance and repairs and property taxes. And don’t forget about insurance. If your down payment amounts to less than 20 % of your home value, you will have to secure a private mortgage insurance (PMI) until the total equity of the home reaches 20%. This could take a considerable amount of time and amounts to a hefty sum you would be spending monthly. In addition to the PMI, there is also a homeowners insurance and you will have to pay more for hazard insurance if you are living in an area that is prone to natural disasters such as earthquake, tsunami or volcano.
2. Building home equity and saving on taxes
One of the most significant reasons for anyone to buy a home is to build equity and to create financial as well as social security. If your equity in the home grows to more than a 20-to-80 percent loan-to-value ratio, you can easily borrow against your equity to buy another property or for your child’s education. In addition, if there is a dip in the interest rates, you can refinance your mortgage at more favorable rates.
Again, it is a very personal and circumstantial choice whether to buy or rent a house. However, what probably shifts the balance in favor of homeownership are tremendous tax savings. You will be eligible to deduct a variety of taxes from your federal income taxes such as mortgage interest, PMI and FHA mortgage insurance premiums, property tax, equity loan interest, prepaid interests or points and even capital gains which is a profit you gain when you sell your home for more than what you bought it for.
Want to explore what tax benefits you achieve when you own a house? Read our article Tax Benefits of Owning a House vs Renting to know more.
3. Your financial situation and current credit score
So, you have decided to take the plunge. But are you confident about your financial situation? You must be sure that you have a stable job and that you are not expecting any cut in the pay or even a lay-off in the immediate future. Your credit score and any other financial obligations also pay an important role in deciding whether you are ready to buy a house or not. In fact, credit is considered a very crucial factor in obtaining a mortgage approval. You must have an impeccable credit score as lenders are only interested to know if you are a good investment and that you can pay off your mortgage debts in time. If you have a bad credit score, it will surely stand out a biggest hurdle in your mortgage application. Not only poor credit score impacts your chances of securing a mortgage, it will also determine how much interest you have to pay. “According to the National Association of Realtors20 % all recent homebuyers delayed home purchases due to outstanding debt.”
Want to shine on your mortgage application? Be aware of the Factors that Can Affect Your Mortgage Application.
4. How long are you going to stay in the location?
It may seem quite a futuristic question as there can many factors such as your job or a personal situation that determines your stay in an area. But if you don’t see at least five years on the horizon living in the same area, give your decision to buy a house a re-think. Are you contemplating a job change that might take you to another city? Renting may be a better option if you think you might need to move to a different place in the near future.
When you are buying a house, it is very important to know that you are going to be tied down for some time at least. So, make sure you are settling for a location that suits your lifestyle and other requirements. Are you satisfied with the amenities offered by the location where you want to purchase your home? If you have a family, are there good schools and playgrounds? Does it have all the facilities to suit your lifestyle such as a gym and a pool? What about pharmacies and healthcare facilities? All these factors should be a part of your list when buying your house.
Why is this all this important? Well, if you want good return on your investment that includes buying cost, broker fees, closing fees and any home improvement and repair work it may entail, it is best to stay put for at least five to seven years if not more. This time span is generally considered optimum as the cost of purchasing a home will be gradually offset by building equity and tax savings.