Back to Basics: So You Want to Buy a Home …

Homeownership

Back to Basics: So You Want to Buy a Home …

* This article was originally published on Oct. 16, 2019. It has been updated for 2021.

Real estate has been quite the hot topic for over a year now. As remote work became more common, those who once had to live in or near larger cities — or face lengthy commutes to the office — began to move further into the suburbs and beyond. Owning rather than renting also became a reality for more Americans due to the relative affordability of owning homes in suburban and rural areas as compared to their big-city counterparts in this new work-from-anywhere world. 

The influx of homebuyers in a low-interest-rate environment, of course, pushed home prices up and inventory down. These would-be buyers searching home listing sites inspired memes and even a Saturday Night Live skit. And you may have heard about the growing popularity of ski town Bozeman, Montana, through the story of a certain resident going around town with a cardboard sign that read, “Please sell me a home.”  

While the hot housing market is beginning to cool down, many locations are still experiencing the “list today, sold tomorrow” reality — with homes selling for cash above asking prices in many cases. And with the average mortgage rate still below 3% and The Federal Reserve having announced today that it’s not planning to raise interest rates until at least late next year or even 2023, now might just be your homeownership moment. So how can you prepare if you’re considering a home purchase? 

Whether you’re in the market for a vacation home, a rental property, or your first taste of the homeownership pie, getting started on the right foot is important. In this installment of my Back to Basics series, I’ll offer a primer on navigating the path to homeownership. Discover your unique reason for — and the associated perks behind — buying a home, plus learn mortgage and insurance basics to help purchase and protect your investment. Let’s get started.

So You Want to Buy a Home … 

Holding the keys to a home of your own can be a momentous experience. It’s the definition of the American Dream. But not everyone dreams for the same reason.

Knowing what’s driving your desire for homeownership can be an important purchase prerequisite. Do any of the following resonate with you?

First-Time Homebuyer

If you spent your younger adult years traveling, saving, or both, making the decision to put down roots can be equally terrifying and exciting. And first-time homebuyers have access to certain perks not offered to experienced shoppers, like lower down payments and federal tax credits.

Vacation Home

If you already own your primary home, a vacation home might be on your goals list. Plus, vacation homes can increase in value faster than those used as main residences, depending on their locations.

Rental Properties

Purchasing a home to use as an income-producing property can come with its own set of unique perks and risks. For example, an irresponsible renter can leave a faucet on or an innocent accident on the property can turn into a litigious nightmare. But the idea of having renters pay off a mortgage while a property grows in value is enough to convince many to go the property owner route.

Extra Family Space

Are you part of what’s referred to as the “sandwich generation”? If so, you’re probably “sandwiched” between the growing needs of your aging parents and the often expensive and expansive needs of your growing children. This can lead those who can afford it to buy a second home, either down the street for parents or across the country near children. 

Relocating

With many workers leaving jobs in the “Great Resignation,”. chances are some of these job and career changes will bring up the idea of relocation. Thanks to technology, you don’t need to live near a rental property to be a property owner. Many homeowners are choosing to rent out their first homes and purchase second homes to use as main residences in their new locations.

What’s your reason? Once you’ve decided to purchase a home, it can be a good idea to ask yourself a few more questions before going over the latest listings.

What location is ideal?

For a vacation home, you might have a few different locations in mind — like a beach house or mountain cabin — that you want to consider. For a secondary family home for the in-laws or visitors, you may want to narrow down the search to your city or even neighborhood.

Will upkeep be an issue?

For a rental property, low upkeep is often an important criterion for property owners. For a vacation home, you might want to research upkeep services before purchasing to make sure they’re both available and affordable.

What size is ideal?

Are you looking for an oversized mansion or a cozy bungalow? There’s no right or wrong answer, but knowing can be a big help during the searching and financing portions of your journey.

Is turnkey or charm more important?

If you’re short on time, buying a brand-new home can be a great option. If you want to customize, building to suit your needs or taste might be your best choice. And if you want a bit of history and aren’t afraid to put in the work, buying and renovating an older home is an alternative that could pay off.

Can you reliably rent your vacation home?

Rather than buying an ongoing expense that you’ll only use a few weeks or months per year, can you position your vacation home as part personal, part rental asset? Will it be easy to rent? Will there be extraordinary upkeep involved? Does your municipality or  HOA allow for short-term rentals?

The Big Question

I left out one important question, and that’s because it deserves the most attention: How much home can you — or do you want to — afford? Being “house rich and cash poor” is a real possibility, especially in an environment of increasing home prices. Depending on your personal financial situation and other life goals, the answer to that question may surprise you.

When purchasing a home, you have two basic options:

1. Buying with Cash

It’s not incredibly common to purchase a home solely with cash. But if you’ve been diligently saving or your bank account has experienced sudden growth — be it from an inheritance, stock compensation award, or alternate source — you may consider this option. The seller you work with might even favor it.

Purchasing a home with cash can save a small fortune on interest. For example, a $390,320.80loan — that’s 80% of the median home price of $487,901 here in Fort Collins — with an interest rate of 2.875% will cost you $192,667.39 in interest over 30 years.

2. Financing Your Purchase

If you’re like most homebuyers, you’ll need to or want to secure financing for your purchase, even if you have a large down payment. If you’re purchasing your first home, you may be able to take advantage of first-time homebuyer programs. Some even allow for tax credits and smaller down payments.

If you’re purchasing a vacation home or rental property, you’ll likely be required to put down more cash upfront. The more you’re able to put down, the smaller you can expect your monthly payments to be. Just don’t forget to consider your mortgage rate.

Insuring Your Dream

Once you’ve done the hard work and secured your new home, you’ll want to take the proper steps to protect your investment. Consider the following insurance policy options.

Homeowners Insurance

A homeowners insurance policy covers a home and its owner’s possessions from perils like fire, smoke, lightning, windstorms, vandalism, and theft. Nearly all mortgage lenders require homeowners insurance, and most will even roll the cost into your monthly payment to fund an escrow account set up to pay the premiums.

Umbrella Liability Insurance

An umbrella liability policy can help protect your assets if you’re liable for an accident that results in damages or bodily injuries. For example, if you are found responsible for a car accident where someone was seriously injured, your home (especially a second or investment property) could be in jeopardy should the victim take legal action against you — and an umbrella policy could offer protection.

Disaster Insurance

If your home is in a flood zone, flood insurance can protect your investment should the water level rise. Floods are not a covered peril included in standard homeowners insurance policies, and the same is true of some types of wind damage, like that resulting from tornadoes or hurricanes. Depending on the location of your home, you may also consider supplemental earthquake insurance.

Even with insurance in place, don’t forget about the importance of having an emergency fund. A prudent guideline is to have three to six months of living expenses stashed away. When you add a second home to the mix, you’ll probably want to increase your emergency fund accordingly. Insurance policies are great safety nets, but they don’t always catch everything and generally won’t pay for regular maintenance. An emergency fund can help make up the financial difference should a claim fall through or major appliance fail.

Your Home’s Value

Whether you’re buying your first, second, or 15th property, it can be difficult to comprehend a home’s true value at first. An appraisal is a great place to start but, once you’re able to call a home your own, you’ll likely realize that there are more benefits than the monetary type to homeownership.

Owning a home can mean a safe place for your family to gather and make memories. And if you’re buying your home with the sole intent of building equity, adding another property to your portfolio can provide a feeling of financial security.

It’s also important to consider the financial implications of homeownership when developing or modifying your financial plan. After all, properties contribute to net worth and are typically hedges against inflation. Over time, your home can serve as an asset that can help fund your children’s education or even your retirement or long-term care need.

Because a piece of property can be such an important piece of your financial puzzle, know that we’re here to be your guide. If you’re ready to start planning your home purchase, schedule some time to meet and discuss your goals. Then, send us some links to available homes similar to the property you’re interested in purchasing. We’ll use them to create our Housing Costs Comparison worksheet just for you. It’s a tool you can use to better understand the total cost of owning property from financing to property taxes and maintenance to HOA fees.

Ready to schedule your next meeting?

Simply head to the Meeting page where you can find and schedule a convenient time to discuss whatever is on your mind.

Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



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There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
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Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
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Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
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