The Home Buying Process - Fiscal Femme Community Q&A
We just went through the process of buying a home for the second time and while it’s fresh in my mind (the good and the bad LOL), I want to share what I know and learned.
I asked you on Instagram what questions you have about home buying and turned it into a Q&A for you here.
How did you decide how much to save for a down payment and closing costs.
When we are saving up to buy a home, it’s common to focus on the down payment because it’s typically the largest expense (by far). If we’ve managed to save 20% for the down payment then we’re all set, right? After going through this process twice, I’ve compiled a comprehensive list of everything that goes into buying a home, from the down payment to the moving costs. Plus, don’t you always want a fresh coat of paint? Here’s the list.
Any way to mitigate the big ticket costs and realtor fees?
Typically the seller pays the broker fee and then it’s split between the buyer and sellers’ agents. As a seller, you can avoid the broker fee by organizing a private sale however that comes with its own challenges like negotiating directly with potential buyers.
There are ways you can reduce big ticket costs during the process. You can and should negotiate your mortgage rate and your moving costs, for example. If you are selling your home, you can try to negotiate the broker fee as well.
Are home warranties worth it?
First, what is a home warranty? With a home warranty you pay a monthly or annual fee and certain repairs and maintenance are covered for your appliances and systems, including HVAC, plumbing and electrical. The exact coverage and exclusions will depend on the provider. The details are VERY important for home warranties.
Having a home warranty gives many people of peace of mind and that’s significant. It can also be helpful to smooth out your costs. That being said, after running the numbers on a few providers, we estimated that we’d probably pay more with a home warranties than if we had to pay for our own repairs and maintenance out of pocket. For our first home, this turned out to be true.
If you run the numbers and choose not to get a home warranty, you’ll want to set money aside into a home emergency fund and create a sinking fund for the regular maintenance on your appliances so you have the funds there when you need them.
What are the steps?
I have a free ‘First Time Homebuyers Guide that takes you through step by step, including how to organize your finances.
How to compare mortgage rates after an accepted offer.
When comparing rates, make sure they are for comparable loans. You want to compare apples to apples.
It takes work to negotiate your mortgage rate but it’s worth it. For example, if you have a 30-year fixed $100K mortgage with an interest rate of 3% (not these days LOL), you’ll pay $51.7K in interest over the 30-year loan. If that goes up 0.5%, you would pay $10K more in interest over the course of the loan and your monthly payment would increase$27 per month. These differences become more substantial as the mortgage size increases.
Also, if at the end of the road, one of your mortgage processes falls through (and believe me, this happens), you have another mortgage lender ready to go.
Here’s how to negotiate your interest rate:
Call up bank #1. Find out what rate they can offer you (you’ll need to have all your stats on hand). Say thanks and hang up.
Call up bank #2. Tell them about the offer you received from bank #1. Are they able to beat it? Great!
Call up bank #3. Tell them about the new offer you received from bank #2. Can they beat it? Ok, yes, they are in the running.
Get a quote or two from an online mortgage company. These are harder to negotiate so it’s just a good reference point.
Call up bank #1 with the offer from bank #3. They can’t beat it. Thanks for playing.
Now it’s time to negotiate between banks #1 and #2. Continue to give each bank a chance to beat out the other’s offer until there’s a winner.
Did you sell your other home and if so, what was that like while buying?
We did sell our first home. We looked around but didn’t find anything we loved right away, plus we had some sticker shock since we hadn’t really been looking for 6+ years. We ended up renting an apartment for 9 months until we found our next apartment.
Any thing you learned from living in a condo that you’re bringing to your new life?
We are still living in a condo but it’s a bigger condo and I’m being very conscious of keeping our stuff under control. Our household is definitely a forever work in progress but I do a lot of giving (on buy nothing groups) and selling each time we move (and throughout the year) and make sure everything has a place. We also bring the kids in on the “fun” and have them take responsibility for putting plates in the sink, tidying up their room and putting their things away after school / camp.
What made you buy?
Despite popular financial advice, I don’t think it always makes sense to buy. Here are important factors to consider:
Timing. How long you plan to stay in this home. There are significant costs associated with buying and selling the home (outside of the down payment) and the longer we own a home, the more time we give it to appreciate and lessen the burden of those costs. You can always sell earlier if the right opportunity arises, but it’s ideal to have the option to stay comfortably where you buy so you can wait out any soft or down markets.
Your Budget. This can determine how long you can stay in a home. If you know you plan to start a family in the next couple of years but one bedrooms are the only workable homes financially in the neighborhood you like, it might make sense to wait.
Your Goals. The financial piece of the home purchase is really important, but it’s not everything. A lot of people purchase a home not because it’s the best use of their capital (i.e., cash) but because it’s something they want. It’s important to them. Maybe they want to have a place to call and make their own. Or maybe it provides a sense of financial security to not depend on the rental market.
Our first home was the best investment we’ve ever made financially. While timing and luck are big factors, we’re hoping to replicate that with our most recent purchase. We have a really good understanding of the real estate market in our specific area and while we can’t predict the future, we try to choose accordingly. And put in small improvements that increase the value as well.
Also, there are some major tax advantages. If you live in your home 2/5 of the last years, you can write off up to $250K in gains on your home sale if single ($500K if married). That’s significant! You could also do a 1031 exchange to avoid paying taxes on the gains.
Balancing investment with more emotional + lifestyle factors.
I think in an ideal situation you prioritize both. You want to be in a home you love, in a neighborhood you love, where you can see yourself living for some time. At the same time, is there a way to do that while also making it a good investment?
I think the key to that is being willing to walk away if you can’t come to an offer that you think is fair. I know how hard it is. In order for me to decide to put an offer on a home, I really try on mentally what it would be like living there. If I love it, it’s tempting to want to offer more money to make the deal work.
Try to wear both hats but at different times and see if it can be a good decision in both cases.
How do you know when you’re ready to buy? Some advice can be discouraging.
One of the easiest ways to see how being a homeowner will feel financially is to “try on” your new expenses for size. Take the estimated monthly costs you calculated, including your mortgage, property taxes, insurance, and HOA, if applicable.
If this is more than you are paying now for housing, transfer the difference to savings each month. For example, if the total will be $2,000 per month and you are currently paying $1,500, pay your bills as usual and transfer an additional $500 to savings. It’s a win-win because you’ll be saving up for your new home while also getting an idea of how this home will affect your spending plan.
I’ll also say saving up for a home is a really big goal. Know that your progress toward your goals doesn’t have to be linear and it won’t be. Just because I’m saving $5 or $20 per paycheck right now doesn’t mean that it will take me 10,000 years to save up for a home. Our progress can be exponential, especially as we learn new skills and get motivated by our results. And it’s okay if it takes you some time to reach this goal! It’s a big one.