Should I Own a Home in 2017?
The average age for home buyers is about 31. The fact of the matter is, many millennials just aren’t quite there yet. They are in their twenties, thinking about (and fearing) buying a home. Owning a home seems quite intimidating when you’re young, possibly single, with mountains of student loans, and a median salary of less than $30,000. Many publications may tell you that millennials don’t want to own a home and for some people that may be true. However, many millennials feel that they simply can’t buy a home according to their current condition.
Homeownership is a tricky thing to generalize about because it varies wildly from state to state. An average home in a rural area could cost around $100,000. Meanwhile, a home closer to the city could cost five times that much. Some millennials might not see the point in buying incredibly expensive property where they live, but have thought about moving to a cheaper area once they are ready to settle down. It just might take a little bit longer for us than our parents and grandparents because we’re waiting for our salaries to catch up.
If you’re one of those people thinking homeownership might be for you at some point, let’s take a closer look to see if buying a home makes financial sense for you.
What to Know Before You Start Looking
Sadly, your mortgage lender won’t just let you sign the paperwork and hand you the keys after you find your perfect home. You’ll have to jump through a few hoops before you actually get the keys — and the deed.
I suggest that the first thing you do is get pre-approved for your mortgage. This way you can find a lender that you like and they can give you a budget for when you’re actually looking at houses. Be aware though, a credit check is needed in order to get pre-approved. Once you find a house that you like, you’ll have to inquire with a realtor and put an offer down on the house. In the meantime, you may want to pay to have the house inspected, which can be a couple hundred dollars, depending on where you go. Check with your realtor and seller before you make an inspection, they will let you know the last time it was done. This will ensure you of the house’s value and that you are paying a fair price.
Next, the lender will arrange for your home to be appraised. This can cost several hundred more. Sometimes, your lender will cover this cost for you or it may be included in the closing costs, but you should be ready to spend money on a good appraiser to ensure you get an accurate appraisal on your potential home.
After your appraiser has confirmed the value of the property, enough time should have passed that you will know whether or not your offer was accepted. If it wasn’t, you can move on or send another counteroffer until it is accepted. If it was accepted then your lender will move onto the next part of the homebuying process. You’ll have to decide on a down payment.
Your lender will tell you what an acceptable down payment is according to your loan, but it’s suggested that you put a 15 to 20 percent down payment on your home. Your lender might not ask for that much, but the reason this is a great idea is you’ll pay off more interest. Lenders will often charge much more interest at the beginning of a loan, which doesn’t allow you to start chipping away at the actual cost of your home just yet.
Your loan will need to be created and funded and you’ll have to wait for “closing” on the home. Closing consists of signing your paperwork, paying the closing costs and filing all the documents. The closing costs vary depending on the price of your home, but on average you’ll pay between two and five percent the total cost of your home in closing fees. So, if you’re buying a $200,000 home, you can expect to pay about $7,000 in closing costs at 3.5 percent. However, it’s not uncommon for homeowners to offer to pay the buyer’s closing costs, but you shouldn’t expect this to happen. Sellers are already paying other costs on their end just by trying to sell their house.
Will I Save Money in the Long Run?
In short, yes. I say this because you’re putting your money into equity instead of just paying a landlord. Any money that you put into a home will come back to you when you decide to sell it (unless for some reason your house significantly depreciates in value). Although, this is a complicated question because the cost of homeownership isn’t entirely one flat rate. When you sign your mortgage, you’ll have to start budgeting for potential repairs and maybe even re-models that need attention throughout your ownership. Really, there are two major costs associated with owning a home — mortgage and maintenance. So, let’s break those down a little bit.
Your mortgage is your monthly payment you’ll need to fulfill each month to keep a roof over your head, but it’s actually much more than that. This cost fulfills a couple aspects of your loan: principal and interest. The principal cost of your loan is the flat rate that your home costs, the price you paid to purchase it. Interest is money you pay to your lender as you pay off your loan. It’s their fee for lending you thousands of dollars. You’ll also be paying property taxes and insurance on your home, which will make up a much smaller, but still significant, portion of your fees.
The average annual interest rate (or APR) for a home fluctuates quite a bit depending on where you live. It can also have unique stipulations (like your APR changing) according to your mortgage, so make sure you are aware of that before you sign. Nevertheless, interest rates are a necessary evil if you want to own a home or take out a loan on anything for that matter. You’ll have to weigh out the pros and cons of having equity and decide what’s makes the most sense for you.
Home equity is how much money you’ve put into the home versus how much your home is worth. For example, if you purchase a home at $200,000 and pay it off for 10 years, let’s say you’ve paid $80,000 of the principal. That’s $80,000 in equity that you now own. You can use that towards the purchase of a new home if you decide to move house. Now, let’s say that your home has also increased in value. If your house is worth $250,000 10 years later, your equity went up without you having to do anything. You can now sell your house for a higher price than you bought it. You’ll have your $80,000 that you’ve put into it, plus an extra $50,000 just because your home went up in value. You might even have a little bit more if you decided to put a down payment on your house.
You’re also going to have to figure in regular upkeep. Things are going to break and you might want to do renovations at some point. While you can always take a loan out for home renovations, upkeep is something you’ll need to budget for. A good budget should have 10 to 20 percent of your yearly income stored away.
How Will It Affect My Credit Score?
As with most things that are reported on your credit, homeownership can positively or negatively impact your credit depending on when you make your payments. As long as you pay your mortgage on time every month, you’ll see a significant increase to your credit score, which means you’ll be able to borrow more money for other large purchases later on. On the other hand, if you choose to pay late or not pay at all, you’ll be facing some serious consequences.
Repercussions can differ depending on where you decide to go for your home loan. Check with your lender to see what their policies are about late payments. Generally, you’ll get a grace period from the 1st to the 15th that grants you no penalty whatsoever. However, after that time, you’ll commonly be charged a late fee. Most home loan lenders will still allow you to pay your bill late until the last day of the month without any negative impacts to your credit. Although, if your payment rolls over into the next month, your credit is most likely going to be affected.
It’s hard to say exactly how much of an impact this will have to your credit because each credit score is tailored to an individual’s entire credit history. Just know that life happens and sometimes we have to make late payments, but if you’re doing it every month (or you’re thinking of it as an option when buying a new home), you may need to tweak some things in your budget to get it where you need it to be.
Lastly, a word on foreclosure. If you are unable to make payments always contact your lender. If you ignore your payments for anywhere between three to six months, your mortgage lender will begin the foreclosure process on your home. The lender will contact you and try to make arrangements to have the remaining balance paid, but if you are unable to do so still, the home will either be sold or become property of the lender. In short, this can be devastating to your credit. Deciding to go into foreclosure on your home can drop your credit score 100 points or more, depending on your situation. So, always try to work something out with your lender before going this route.
A lot of this verbiage may have come across as foreboding or menacing because, yes, there are a lot of aspects to homeownership that could possibly go wrong — and you need to be aware of them. However, if you keep a level head, plan ahead, and manage your money properly before you decide to buy a home, you’ll be just fine. Is 2017 the year that you buy a home? Who knows. Is it a financially sound decision to own a home in 2017? Absolutely, yes, but only if you’re ready. There’s no need to rush into such a large financial decision, even if you are reaching that median age of 31. If you don’t feel ready now, keep saving, check around for better deals, and something will come to you.
For more information on credit scores, visit our credit score resource center.
Image source: https://pixabay.com/
Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.
This post was updated December 20, 2017. It was originally published May 27, 2017.