One of the best ways to build personal wealth is to own the home you live in. I just read today that Charlotte, NC is one of the top cities in the US for over-inflated house prices. Yep, the Queen City is actually #5. This means it’s harder & harder to enter this housing market, either as a first time home buyer or maybe you’re relocating to this area. Moving within the Charlotte region is easier, because you’ll sell high & buy high – a lateral move. Rent prices are also sky-high, and it doesn’t appear that prices will soften anytime soon. So what do you do?
Just like every financial decision you will make in your life, you have to determine what is the best scenario for YOU. Interest rates of 3% were a very lucky blip in our history, and we probably won’t ever see those again (never say never!). 6%-7% interest rates are historically great rates! I have heard some older folks talk about interest rates being in the 20’s! However, we are in unprecedented times of higher PRICES (there’s that top 5%), coupled with higher interest rates, we find ourselves in a much more challenging position.
Again, it begs the question: what do I do? Should I buy? The short answer is YES. Yes, it’s always wise to buy a home. But, buy wisely. Do whatever is in your power to make a good decision. Here are some practical tips/ideas:
1. Build a savings account for emergencies. Before you do anything, you should save at least $1000. Then you should work on your debt snowball (see below), then continue to save. Having a decent buffer will help you stay away from high interest credit card debt that can derail your plan to ultimately be a home owner.
2. Pay off other debt. Use the debt snowball tactic – pay off your smaller debts, gradually kill off each one, until you have no other debt. For example, if you have a store charge card (balance: $500), a VISA balance (remaining balance $5000), a car payment (remaining balance of $15,000), etc – line them up in order of smallest to greatest. Attack them with a vengeance! You’ll find great satisfaction & a lightening of your load as you do this. Ultimately, you’ll not be beholden to anyone, and your debt to income ratio will be greatly improved, giving you more options for a better mortgage loan.
3. Save enough for a decent downpayment. The more you can put down, the better off you will be. You’ll have a lower monthly payment, and with at least 20% down on a conventional loan, you can forego the dreaded PMI (private mortgage insurance). Mortgage insurance is not insurance for you if you lose your job, or have another financial crisis. It’s mandatory insurance that you pay for to insure the lender against your default. If you have enough skin in the game, the lender will not require that you buy PMI. If you can’t save 20%, still try to have as much as you can. PMI isn’t the very end of the world, it’s just best if you can avoid it. If you get a mortgage that has PMI, ask your lender at what point you can drop it (once you own 20% of the current value of the home). Bear in mind, some loans do not allow you to drop the PMI, so be sure to ask and not assume.
4. Look for homes in good school districts if at all possible. (better for resale & for your home value to grow)
5. Buy in a lower-taxed county/city. Some homes are in city limits that impose tax in addition to the county tax. This directly affects your monthly mortgage obligation.
6. Be wary of homes with old mechanicals – HVAC, roof, windows, water heater(s), etc. If the home you are purchasing has older mechanicals, be sure you have sufficient savings to repair or replace these. Don’t spend every dime to get into the house, or you will find yourself in financial trouble sooner than later.
7. Do some math (or get some help with this) – to figure out what your monthly payment would be given the current interest rate, price of the home, taxes, PMI (if you have it), HOA dues, home owners insurance – and see if it makes sense with your budget. A good rule of thumb is to have your monthly “roof over your head” obligation to be no more than 1/3 of your income.
8. If that last statement scared you, then consider how you can cut out needless expenditures from your budget, or get a second job to kill debt and/or boost savings.
I know a lot of this seems like simple advice. It’s simple to advise, but difficult to do. But if you’re determined to be a homeowner, you CAN do it. If you would like to talk more about this, do some math together, or brainstorm if buying a home is the right fit for you – I’d be thrilled to hear from you. I’m available most every day, and return calls (if you get my voicemail) – usually within a few hours.
Jen Masucci (704-254-6432)