Owning a home is a great way to diversify your investments, build wealth and reduce your taxable income. Saving enough for a down payment on your first home can take time, but there are steps you can take now to lay the foundation for purchasing your dream home.
Determine if home ownership is really for you
The costs and responsibilities involved in owning a home can be overwhelming if you’re not prepared for them. “Home ownership is a lifestyle, and it’s not for everyone,” says Laura Adams, personal finance expert and author of Money Girl’s Smart Moves to Grow Rich.
If you’re thinking of buying, ask yourself how comfortable you are with putting down roots. “Before you buy a house, you need to be sure you’ll be living in one place for at least five years,” Adams says. That’s about how much time it will take to recoup your purchase costs. Otherwise, depending on the market, you may be tied to your home or forced to rent it out if you want to move.
Shop for a mortgage before you shop for a home
“A lot of first-time homebuyers have their hearts broken because they fall in love with a house they can’t afford,” Adams says. Your mortgage lender can determine a home price that fits your budget. Ideally, your payments shouldn’t exceed 25 to 28 percent of your monthly gross income, but it’s important to factor in your total debt, too.
Thoroughly research all the mortgage products available to you. When interest rates are low, a fixed-rate mortgage over a 30-year term can be a stable and affordable option, especially for buyers who intend to stay in their homes for many years. But the average first-time homebuyer turns over his or her investment in under 12 years. If you plan to sell sooner rather than later, an adjustable-rate mortgage with a lower starting interest rate may make more sense. Either way, knowing your options up front will help you choose a property, price and mortgage product that fits your overall plan.
Save for a down payment
Buying a home requires an up-front cash investment ranging from 5 to 20 percent of the total purchase price. There’s no magic wand you can wave to make that kind of money appear, but there are some shortcuts you can take. “The majority of your money probably goes to housing costs, so that’s where you need to look,” Adams says. Reducing rental expenses by taking on a roommate or moving in with someone can help you save more money faster.
Making a budget can help keep your spending in check, and automating your savings guarantees that you pay yourself first. “Most employers can deposit a portion of your paycheck directly into a savings account for you,” Adams says.
Order your credit report
In order to qualify for a mortgage at a favorable interest rate, you need to demonstrate you have the income to make the loan payments and the inclination to do so. Your credit report is a record of your bill-paying history, and it shows a lender how responsible you’ve been about paying your debts. “The higher your credit score is, the lower your interest rate will be,” Adams says. Correcting any errors on your credit report and paying down your debts before you apply for a mortgage can help boost your credit score and get you a better rate.
Preparing yourself financially and emotionally for the responsibility of being a homeowner will save you money in the long run and bring you peace of mind when your dream becomes a reality.