Buying a home is often the biggest financial decision you'll ever make.
It's not just about choosing a place to live; It's about a long-term investment that will impact your financial future for years to come.
So, if you're looking to buy a home, there are certain steps you should take to prepare for the purchase, according to several advisors ranked on CNBC's list of financial advisors for 2024.
“The No. 1 thing is to do your initial homework and financial planning,” said Brian Brady, vice president at Obermeyer Wood Investments in Aspen, Colorado. The company is ranked No. 23 on the 2024 CNBC FA 100 list.
More importantly, it should be a “smart financial decision” that makes the most sense for you, explains Steven Cohen, co-founder and co-president of Sage Financial Group in West Conshohocken, Pennsylvania. The company is ranked No. 61 on the 2024 CNBC FA 100 list.
“I've met a lot of first-time homebuyers, friends, kids, acquaintances. They've fallen in love with the home, and it may not make sense for them financially,” said Ron Brock, managing director and chief financial officer at Sheaff Brock. Investment Advisors in Indianapolis, Indiana. The company is ranked seventh on the 2024 CNBC FA 100 list.
He tells them: “Just be smart. Don't be poor at home.”
Here are some basic steps to consider if you're planning to buy a home:
1. You have a strong credit score
Make sure you have strong credit, said Sean Williams, a private wealth advisor and partner at Paragon Capital Management in Denver, Colorado. The company is ranked No. 38 on the 2024 CNBC FA 100 list.
“The higher the credit score, the better the terms you will get on the loan, and the lower the interest rate,” said Ryan Dennehy, a financial advisor at California Financial Advisors in San Ramon, California. The company is ranked No. 13 on the 2024 CNBC FA 100 list.
For example, a FICO score of 760 to 850 may qualify for an annual percentage rate of 6.226%, according to Bankate.com. That could translate to a monthly payment of $1,842, Bankrate found.
On the other hand, a FICO score of 620-639 might get you an APR of 7.815%, which roughly equates to a monthly mortgage payment of $2,163, according to Bankrate's examples. They are based on national averages for a 30-year fixed mortgage loan of $300,000.
You can start the process by paying off any existing debt you have on time and in full, and avoid new loans as you get closer to buying a home, experts say.
2. Start saving for the down payment
While a 20% down payment is not required to purchase a home, buyers try to put more money down to avoid mortgage insurance costs and potentially lower monthly payments.
In the third quarter, the average down payment was 14.5% and averaged $30,300, Realtor.com told CNBC.
In order to start saving for a down payment, you need to know your cash flow, or how much money is coming in versus the money going out each month, said Stephen LaRosa, director and senior portfolio manager at Edgemoor Investment Advisors, based in Bethesda, Maryland. . The company is ranked No. 14 on the 2024 CNBC FA 100 list.
Also try to maximize the amount of money you can save or put toward a down payment, LaRosa said.
3. Boost your emergency savings
It's not just the down payment, Williams said.
“You should have six months of your spending needs, including household spending needs, in an emergency fund,” he said.
You don't want to be in a situation where you use up all your savings to cover the upfront costs of purchasing a home and end up with no money left over.
Spending on home emergencies reached $1,667 across 1.5 projects per household in 2023, according to a report by Angi, an online marketplace for home improvement professionals.
3. Think about the lifestyle you want
Ask yourself what kind of lifestyle you're looking forward to, Brady said.
“Are you looking for an apartment? Do you want a single-family home?” He said.
Then you can focus on factors like location and price, Brady said.
Meanwhile, some of the additional costs that come with owning a home are driven by where you live, such as property taxes, utility costs, and insurance.
In some areas, it's “almost impossible” to get home insurance, Brady said. “And if you can (get home insurance), you pay a lot.”
Nearly three-quarters, or 70.3%, of Florida homeowners and 51% of California homeowners say they or the area they live in were affected by higher home insurance costs or changes in coverage in the past year, according to Redfin, a real-world company. Online. Real estate brokerage company.
5. Factor in other homeownership costs
Owning a home goes far beyond your monthly mortgage payment.
Experts say you need to factor in the additional costs.
Up to that point, homeownership costs an average of $18,118 per year, or $1,510 per month, according to a report from Bankrate.com. The national average figure includes costs for property taxes, homeowners insurance, and electric, internet and cable bills. Maintenance was estimated at 2% per year of the home's value.
“These are very important additions that people sometimes look at and don't put enough weight on,” Cohn said.
Since these costs are unlikely to decrease over time, it's important to have an emergency fund to cover the costs of homeownership, experts say.
6. How long do you plan to stay home?
“We like to use a period of five to seven years as a minimum,” Cohn said. The longer you stay at home, the more likely fixed costs are to be amortized or paid off over time, he said.
Plus, in the early years of a loan, you're mostly paying the interest rate, not the loan itself, experts say.
“You don't accumulate any equity from putting money in the mortgage for the first 5 to 7 years,” Cohn said.
“If you start looking at how much goes to principal and how much goes to interest in the first several years, it's probably all going to get interesting,” Brock said.
