April is National Financial Literacy Month; I am continuing my series on financial skills for teens. As a reminder, Financial Literacy is making informed judgments and effective decisions using money. Buying a Home requires some thoughtful planning and know-how. Home buying includes a mortgage and financing. Do I expect teenagers to go out buy a home? Of course not! What is the first thing you need to do before buying a home? Determine your needs.
What type of housing should I buy? How many bedrooms do I want? How many bathrooms do I need? What size home do I need? Do I want a two story or one story home? Is entertaining important in my home? Do I want a pool? Do I want a yard? How big a yard do I want? What style do I want in a home? Do I want a Colonial, Spanish, Tudor, Ranch, or traditional home? What am I willing to compromise in a home?
How much can I afford to spend? Freddie Mac says buyers should not pay more than two and a half (21/2) times their annual income. This a rough estimate, the actual number is based on current interest rates, credit history, and debt. Buyers should not spend more than 38-31% of their monthly income for total housing expenses (mortgage payment, property taxes, & insurance). Another factor is total debt which can exceed 30-40% of your gross monthly income.re do I want to live? Do I want to live close to work? Do I want to live near relatives? Do I want to live in the city or suburbs? Is the school system important to me? Even if you do not have or want to have children, schools affect your home’s value. You can live further away from work and get a larger, newer or better home. You may spend more time commuting and not be accessible to your children or spouse. Different neighborhoods and cities or towns have different services. In the city or near a city, there is public transportation.
What aspects of the home need improvement? Are you willing to buy a fixer upper? Are you willing to remodel your home or add a room? Are you only willing to paint or do minor repairs? How much are you willing to do or pay to change the house? This can be an important question because you may be able to do the work yourself or need to have someone else do the work. Either way, an estimate of the work will be important to help make your decision.
What is an appropriate market price? Find a realtor who you have confidence and you can trust. He or she is very important to find what you want at the best price. He or she will provide you comparative pricing on similar homes in the area to help you determine if the price is fair. It is your decision, but he or she can help you a great deal. Don’t forget they are still sales people and you still need to make the final decision.
How much negotiation movement exists? Similar to cars, buying a home is a negotiated sale. How much do you want to offer the seller to buy the home? How much will the buyer accept for the home? There are a number of factors that will motivate the seller and buyer. A cash buyer or pre-approved financing helps the buyer. This is very much a supply and demand market. If there are very few homes for sale in a particular market and it is priced well, the seller has an advantage. The actual final price is negotiated to determine what the value of the home is. Hence it is called the market price!
Financing should be obtained before you start shopping. How much down payment is available? Twenty percent is required by most financial institutions. Less means other factors will be scrutinized more because you have a lower down payment. What are the current mortgage rates? Do you expect to stay in the home a long time? Then you probably will want a fixed rate mortgage. Do you plan on living in the home for 5-7 years? You may want a fixed rate mortgage but with a shorter term. The rates will be lower based on the period of time the bank will loan you the money. Can I qualify for a mortgage? Your credit will determine how much you will borrow and how much you pay for the loan. What type of mortgage should I get? 15 or 30 year fixed? 5 or 7 year adjustable rate mortgage (ARM)? These choices affect how much you pay for your home over the term of the mortgage.
Buying a home is an important decision! It is probably the biggest purchase you will make in your lifetime. It is an emotional decision, but it should be a financial decision. Preparation is important in making a good decision. Saving for a down payment usually takes years and a lot of sacrifice. Good credit also takes years of responsible behavior and you do not want to make a mistake. Start early with savings and acting financially responsible. What are you going to do?
Photo by: gailf548