Here are ten steps to think about if you are considering buying a home in Metro Phoenix Arizona:
1. Work out the total cost and make sure you can afford it.
Make sure you can afford the new place, including all the costs you might not be thinking about. The obvious ones are the mortgage (home loan) payment, property tax and homeowner’s insurance.
Here are some other home costs that can quickly add up and that may be part of your home purchase:
Utilities — your power, water and gas bills — can run up way into the hundreds of dollars per month on a home in an area with very hot or cold weather. Make sure you know roughly how much you will pay in utilities. Your seller may give you copies of their utility bills, if you ask.
- Homeowner’s Association payments
For a condominium or similar community, Homeowner’s Association (HOA) dues might also cover some expenses like utilities or insurance. Make sure you know how much you will owe and what it covers.
Fixes can end up averaging from 0.5% to more than 2% of the home’s value per year, though that tends to come in bursts (broken furnace, roof, exterior painting). It’s always a good idea to build up a buffer — an emergency savings fund — especially if this is your first home, so you are covered if a major maintenance issue comes up.
- Renovations and improvements
You may have to buy additional furniture, upgrade appliances, fixtures and flooring or making other improvements. This can be a big expense.
- Landscaping and house cleaning
If you don’t have time to do it yourself, you might have to pay for landscaping, house cleaning and other upkeep type services.
- Closing costs
The purchase itself comes with a bunch of closing costs, such as a home inspection, title insurance and loan fees. You’ll have to account for these.Average closing costs can include application fees, loan origination fees or (points), appraisal fees, home inspection fees and property surveys, prepaid interest and other fees. These can really rack up. You can find closing costs on your Good Faith Estimate, which is something that your lender is required to give you. Make sure to find out what these are and account for them in your budget.
- Moving expenses
If you don’t do it yourself, you’ll have to pay for movers. If you do move yourself, you may have to pay for equipment rentals in addition to packing materials.
2. Keep your mortgage payments low.
Your home should cost no more than 3 to 3.5 times your annual income. It’s not an exact figure, but it works pretty well for a lot of people. Also, don’t spend more than 30% of your gross income (your pay before taxes and other things are taken out) on your mortgage, property tax and homeowner’s insurance.
Also, don’t let home-related expenses add up to more than 36% of all your combined debts (car loans, credit cards, student loans, etc). During the early 2000′s, many people were spending five or seven times their income on their house and spending a lot on debt. That’s what led to the housing bubble and the economic downturn.
If you can, try to have a down payment of 20% of the cost of the new home. This will help save you money in the long run because it will lower your interest rate. You’ll also avoid having to pay Private Mortgage Insurance (PMI). Also, you’ll feel great knowing that you own 20% equity in your new home while financing 80% with the mortgage lender.
3. Understand everything about your mortgage.
Before you sign the papers, you need to know:
- When monthly payments start and end
- How much they are
- How much they can adjust to in the future if they aren’t fixed.
Be extremely careful of using interest-only mortgages, which in effect mean you’re just renting from the bank and delaying even larger payments in the future. Also be careful with adjustable-rate mortgages, particularly if you plan to stay in the home longer than the initial fixed-rate period. Be sure to raise any questions you may have with your loan officer or loan broker before signing the loan documents.
In general, we recommend buying a home with a fixed-rate mortgage that has a 15 or 30-year loan term, depending on what you can afford. That way, you know how much you’re going to be paying in loan principal versus interest, so you’re not caught off guard.
One mistake many people make is buying too much house. Don’t be fooled into buying more house than you need.
One big mistake many people make is buying too much house — you don’t want all your money going to your mortgage each month and being stuck living paycheck-to-paycheck, not having any left over to enjoy life. Buy a home that is the right size for you and has a price that allows you to keep your mortgage costs low. Don’t be fooled into buying more house than you need to be comfortable.
4. Get your own inspection.
Get a home inspection by someone independent of the seller, so you can learn about any hidden problems.
5. Don’t buy before selling.
If you buy a new home without having sold the former one, you could end up in a cash crunch while paying two mortgages and two sets of expenses. Sometimes you don’t have a choice, but try to sell first and then buy.
6. Think about your commute.
Include commuting costs and hassles as part of your home-buying decision. If you add a 90-minute commute that burns $250 in gas per week and wears down your car (and you!) that much faster, is the place really cheaper than a home closer to work that costs more?
7. Know your tax benefits.
If your buying decision is based in part on the tax benefits of home ownership, be sure you fully understand what those are and whether you’ll really see much of a benefit. For example, if your mortgage payments and property tax are too low for you to take deductions, you’ll get no tax benefit.
Before you buy, talk with a certified accountant (CPA) or other tax pro and have them run a tax projection with and without the new house to see exactly what the benefit will be.
You may also be able to do this yourself using a tax software like:
- TurboTax: turbotax.intuit.com
- HR Block At Home (formerly TaxCut): www.hrblock.com/tax-software/index.html
Using paper forms for it is possible, but difficult.
8. Make your own decisions about costs.
Don’t rely on real estate agents for confirmation that a home price is reasonable. Agents are in the business of selling houses, not preserving your hard-earned cash. One of the topics addressed in the highly acclaimed book and documentary Freakonomics was how real estate agents seem biased toward higher pricing when the money isn’t their own to spend.
Do your own comparison of the rental value of the home versus its ownership costs, and of the prices of similar homes, and be very skeptical when anything seems out of line. Some good sources for checking out listing proces, actual values and sales prices of homes nearby are:
9. Build up your emergency fund.
Plan to have a larger emergency fund if you’ve been renting in the past. A homeowner can have unexpected repair costs pop up, and you want to be able to pay those out of checking or savings instead of running up credit card debt.
Things to do when you move
When you’ve bought your home and it’s time to move, here are a few steps you can take:
- Get a mover.
If your time is more valuable than the cost, invest in a good moving company. If you can’t afford it, then do the move yourself. Ask around for moving recommendations and, before you pick a mover, get references. When you have a few choices narrowed down, check with your local Better Business Bureau to make sure they aren’t negatively rated.
- Deduct moving expenses on your tax return.
See if you can deduct moving expenses on your tax return. Typically this is only if you move a long way for a job, and itemize your deductions. Be sure to keep your all your receipts associated with the move. The full rules are described in IRS Publication 521.
- Tie up all loose ends.
You’re leaving your past home, so be sure to square everything away there. Transfer the utilities out of your name, or have them shut off. Cancel the phone and cable, or have it transferred to your new place if that’s an option.If you were renting, ask for a move-out inspection at least a few days before the last day of your tenancy, so you can confirm that your landlord is happy with the condition of the place and will return your security deposit (fix any deficiencies). Get your contact information to your landlord so he knows where to send your check. For all of this stuff, do as much as possible in writing so you have a paper trail.
- Change your address.
Tell everyone about your new address. Start with the post office of course, by filling out a forwarding order, but don’t forget ones that can result in money problems if you can’t be found later. Examples include banks and other financial institutions where you have accounts, your current and possibly prior employers, your insurance company (auto rates might change), and the IRS.
- If you changed states, update your identification and tax documents.
If you changed states, here are some things you need to do in addition to the typical move:
- Get a new driver’s license.
Some states slap you with a fine if you get caught with an out-of-state license and have lived in the new state for a while.
- Figure out how to split income taxes by state.
If you moved states, you need to figure out how you’ll have to split your income tax returns for the year. Typically the income is divided based on when it’s earned, and where you lived at the time, but this can be complicated to figure out. Each state with an income tax typically has forms and instructions specifically for part-year residents. This can be difficult to do alone, so talk to a tax professional for guidance.
- Re-title your property if you have to.
See if any assets you own need to be re-titled based on your new state’s laws. An example is if you moved between a community property state like California, and one that doesn’t recognize community property.
Here are a few online resources you might find useful if you are considering buying a home in Greater Phoenix:
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