Companies and their employees have already been trending toward relocating from big cities with high rents and other issues. With the current housing and employment market, many have even greater motivation to relocate.
Buying a new home is exciting, but it is also one of the largest financial commitments you’ll make. A financial professional can assist in ensuring that all of your financial ducks are in a row. They can help you work through questions like: How is your cash flow impacted in the short and long run? How will it impact your retirement and saving for your child’s higher education?
Consider these ten things before you make a move:
1. Do Your Research
Consider the factors that are most important to you. Good schools, commutable to a city, etc. Then really “dig in” to research the area you want to live. As they say in real estate: “location, location, location.” From there, you can start to consider what factors in a home are important to you (e.g., number of bedrooms, a home office, pool, etc.).
In addition to researching the neighborhood, you’ll also want to spend some time looking into who you’ll be working with. Don’t necessarily go with the first real estate agent or broker you meet; interview several to find out which one has the most experience and is the right personality fit. After all, they’re going to be your greatest advocate in all areas from understanding the right home for you and your family, to negotiating the purchase price.
2. Consider How Homeownership Builds Equity
Building equity is important, and buying a home is generally a great opportunity to either start or continue building equity. Real estate is an investment, and you can think of your home as part of your portfolio. Depending on your long-term goals, your financial advisor can help you consider how homeownership can help you build equity and if you are better off maintaining your current home equity or making a change.
3. Factor in the Overall Cost
How much can you afford? “House poor” is when too large of a percentage of your total household income is spent on home ownership, including mortgage payments, property taxes, maintenance, and utilities. “House poor” leaves little cash flow for much of anything else. Here is where a financial planner can add the most value. They can crunch the numbers and show you how it will work.
Keep in mind that buying a home is more than just your monthly mortgage payments. You also want to be sure to factor in all of the additional closing costs that can balloon the final costs of purchasing a home.
4. Take a Closer Look at Your Credit Score
A good credit score is important—not just for securing a home loan, but also for other financial components in life. In the months leading up to buying a home, take the time to check your credit score and address any issues (or surprises) that come up. Since your mortgage loan officer factors in your credit score when determining your loan interest rate, doing what you can to improve your score now could save you thousands in interest over the life of your loan. It could even mean the difference between receiving a fixed or adjustable interest rate on your mortgage—which, again, could result in savings in the long run.
5. Review Your Mortgage Details
As of this writing, mortgage rates are currently at an all-time low. Your credit score will be a major factor in qualifying for a mortgage (which is why you want to correct issues, as discussed above). Mortgage lenders will also look at the loan-to-value ratio and your income versus mortgage payments. Don’t buy a home based on the maximum amount that you qualify for, as this may leave little room for financial maneuvering. Again, you want to avoid becoming “house poor.”
Note that mortgage interest can be tax deductible if you itemize your deductions. Homeowners who buy houses after December 15, 2017, can deduct interest on the first $750,000 of the mortgage on their federal taxes.
6. Assess Property Taxes
Besides the mortgage, annual property taxes are determined by assessing the value of the property. Remember: “location, location, location.” The assessed value of a property is dependent on the desirability of that location and the prevailing local real estate market conditions. The assessor takes into consideration what comparable properties are selling for under the current market conditions, how much replacement costs for the property would be, the maintenance costs for the property owner, any improvements, and any potential income on the property—among other items. Depending on your local housing market, external factors like the local school system could also have an impact on your property taxes.
Property taxes are also tax deductible if you itemize your deductions. However, starting with the 2018 tax year, the Tax Cuts and Jobs Act (TCJA) placed a cap of $10,000 per year on federal deductions for State and Local Taxes (SALT), including property tax.
7. Prepare for Possible Income Tax Implications
If you are moving to a new state, you need to consider the tax implications. Does the state have an income tax, and is it more or less than what you are paying now? In addition, if your new home establishes your permanent residence in a state that is different than where your employer is located, you need to consider tax implications and work with your employer to ensure that tax withholdings are made for the correct state. Consult a financial planning or tax planning expert on this, as it can be tricky depending on your unique circumstances.
8. Invest in a Home Inspection
Home inspections are typically optional by the home buyer; mortgage lenders look primarily to an appraisal, but don’t always require a home inspection. However, as a new homeowner, you don’t want any surprises. A home inspector is trained to evaluate all aspects of a house, including the foundation, the electrical, the roof, plumbing, etc. A home inspector can alert you to whether repairs or maintenance—and the added costs—will be needed (e.g., a new roof). These findings can also be used in the negotiations for the home.
9. Don’t Forget Moving Costs
When it comes to physically moving, many people opt to hire some assistance. But before you do that, make sure you do your research to select a reputable moving company. Check the Better Business Bureau (BBB) and other sources, including if the movers have any certifications from organizations such as the American Moving & Storage Association (AMSA). You are entrusting your belongings to the movers, and you don’t want them damaged, lost or stolen.
On top of that, you don’t want to forget about any costs associated with settling into a new home. For example, maybe your new dining room is small and your current dining set doesn’t fit in the space comfortably. Or, maybe there are fewer closets so you need to buy closet organizers. Going from a 3-car to a 2-car garage might mean renting a storage space or buying shelving units. Whatever the case may be, there is almost always some sort of unexpected cost to settling into the new space.
If you are going to have a mortgage on your home, homeowners insurance will be required. Even without a mortgage, homeowners insurance is strongly advised to protect against catastrophic losses such as a fire. Read your policy carefully to understand what is covered and what is not.
Given that buying a home is one of the largest financial decisions you’ll make, it shouldn’t be done lightly. There are financial considerations that have to be taken into account beyond just the monthly mortgage payment. A financial advisor can help you consider all of the costs associated with buying a home and how it fits into your overall financial plan.
MBA, CFP® AIF®, CPA, CPFA, Life & Health Insurance License Chris has more than 30 years of experience in the financial services industry in the areas of accounting and financial planning. He is well-versed in the financial challenges faced by most individuals. Chris has also authored articles on financial planning, divorce and the financial markets. In addition, for those going through divorce, has appeared as a subject matter expert on a number of media outlets, as well as...Read More