New Year Goals and Four Tips For First Time Homebuyers
Welcome to 2018! While it may seem cheesy or cliche to some, I love the promise of a new year and the hope of all of the exciting opportunities and adventures to come. I am a firm believer in using this time to reflect on what you loved (and didn't love) about the past year and setting clear goals to make the upcoming year even better than the last.
In 2017, I set two goals for the year to come and am happy to say that with focus, planning and a little sacrifice, I was able to accomplish both.
1) Travel to a new place each month of the year - In 2017, I traveled to six countries, seven states and 20+ new cities and towns. I can't say enough how much value these experiences added to my life. By setting a clear and specific goal versus simply "Travel more," I was able to measure my progress and hold myself accountable. More to come in a future post about how I was able to make so much travel happen, but big thanks to my Chase Sapphire card points
2) Purchase a home in Seattle by November 2017 - This was by far one of the most exciting moments of not only 2017, but, honestly, my life so far. Over conversations with many friends and peers, I know this is a goal that many are committing to for 2018. This is one that takes a little more planning (and a lot more money) than most New Year's Resolutions, so I want to share a few things that I learned through the process to make it even easier for others!
FOUR TIPS FOR FIRST TIME HOMEBUYERS
Meet with a mortgage broker before you start looking.
As someone who has watched more episodes of Say Yes To The Dress than I would care to admit, I have definitely learned the importance of setting a budget before you start shopping. Without a true budget, of course you are going to fall in love with something out of your price range. Just like the brides visiting Kleinfeld's, once you try on the $15,000 gown, everything else pales in comparison. This is even more true of a home. I mean you'll be living in this home for years versus wearing a dress for one day. Not only is it important to set your price range, but meeting with a mortgage broker is critical in today's competitive market. Homes are on and off the market in a matter of hours. If you fall in love with a home, you need to be able to act quickly and you can't do that if you haven't done all the ground work to qualify for a loan.
For Seattle area buyers, I had an amazing experience with Jeff Brown at Axia Home Loans. Incredibly hands on, took the time to answer all of my questions (even the dumb ones) and could genuinely tell he had my best interests at heart.
You CANNOT "out save" the market.
A few years ago, I met with a mortgage broker to discuss applying for a loan and purchasing my first home. After our meeting, I decided to wait a couple of years until I saved up a little more cash to put down. Fast forward two years and thousands of dollars more saved. With the rate at which the housing market has exploded, I was actually in an even worse position than two years prior in terms of the kind of home that I could afford. In the last year alone, the Seattle real estate market, or what the average home is worth, has increased by 15.2%.
Take just a $500,000 home in 2016, a below average price for the area. A 15.2% increase in value means that the same home in 2017 is worth $76,000 (!!) more than the year prior. I doubt any of us are saving at that kind of rate each year. The point is that unless you anticipate a LARGE bonus or promotion within the coming year, what you can afford today is exponentially better than what you will be able to afford in a year to come.
You don't need as much cash as you think you do.
This tip goes hand in hand with not being able to out save the market. Many of us have grown up hearing the rule of thumb of a 20% down payment. I think this discourages many from even pursuing their dream of home ownership, but I want to assure you that this is just not true of today's market anymore.
The median home price in the Seattle area today is $708,600. At a 20% down payment, that equates to $141,720...! This amount doesn't include what you would need to pay in closing costs, not to mention that you probably don't want to wipe out your entire life savings to purchase a home. If you followed the advice of our parent's generation, you would probably need close to $175,000 saved to comfortably purchase the average home in the area. Yeah..I don't think so.
If your goal is to purchase a home, you can definitely accomplish this with as little as a 3-5% down payment. It doesn't change your monthly payments that drastically and is a much more achievable goal for the average person. Meet with your mortgage broker and discuss your options, but know that you probably don't need to save nearly as much as you may have heard.
You will likely want a mortgage payment significantly less than your current rent payment.
If you're anything like me, your current rent payment is likely close to the max that you feel comfortable spending on housing. My portion of rent over the past few years had averaged around $1500 a month and I didn't feel comfortable exceeding that by any more than a few hundred dollars. When I set out shopping for a home, I initially thought I could afford anything with my portion of the mortgage at around $1800 or less. However, there is much more that goes into a monthly payment on a home than an apartment.
With renting, you have the fixed cost of rent and that's basically it. Maybe minimal costs for renter's insurance and utilities, but your monthly rent payment is pretty much the ceiling for what you will pay each month.
With a home, there is much more that goes into the monthly payment, so definitely don't plan to use your rent payment as a baseline for what you can afford as a mortgage.
Mortgage Payment - Obviously.
Mortgage Insurance (PMI) - Monthly payment that is required of any buyer who puts down less than 20%. Plan for this to be 1% of the total purchase price. i.e. For a $400,000 home, annual PMI is $4000, $333 a month. However, this payment goes away once you hit 20% equity in your home. In today's market, this will actually happen more quickly than you think. With a combination of your payments toward the loan and the rate the market is increasing, this payment will likely go away in two years.
HOA Dues - This will likely be required if you plan to purchase a condo, townhouse or home in a planned community/development. Most first time buyers will end up purchasing a home that requires HOA as these are generally the more affordable options available versus a stand-alone, single-family home. Expect HOA dues to also be around 1% of the purchase price. Again, for a $400,000 home, this would be a $333 payment each month. When you're looking, I would definitely be wary of any home that has an HOA payment much higher or lower than the 1% mark.
Property Taxes- Property taxes vary by state, but are also part of your monthly home payment. Washington State is #30 of all states in terms of property tax rate, averaging 0.88% of the home value. However, King County is much higher than this and actually has one of the most expensive rates in the country at 1.01%, with the Seattle metropolitan area being even higher than that. Again, estimate a minimum of $333 a month on a $400,000 home.
Home Insurance - Similar to renter's insurance. You use a third party agency such as State Farm, GEICO or Allstate to protect your assets inside your home, as well as the physical structure. Expect home insurance to be more costly than renter's insurance, but a relatively small expense at $50 a month or so.
Overall, I had an exponentially better experience shopping for a home than I could have imagined. I had heard more horror stories about the process than I could count about multiple offers, bidding wars and searching for months (or even years!). With the help of an amazing realtor, Doug McKiernan at Windermere, I actually found the perfect home on the first day of searching and had my first offer accepted. For any Seattle area buyers, I would highly recommend working with Doug. Not only does he have two decades of experience in the Seattle real estate market, he worked to understand exactly the kind of home I was looking for, had a network of reliable contacts in home inspections and maintenance and was a highly skilled negotiator. He successfully negotiated for the seller to pay the entire sum of closing costs, saving me about $8000!! Choosing an experienced realtor quite literally pays. With the right team behind you and the right preparation and expectations on your part, you can definitely achieve your goal of home ownership!
Wishing you all a wonderful 2018 and hope that you achieve all that you set your mind to. As always, I am happy to answer any questions that you may have, either through my contact page or a one-on-one consultation.
