3 Questions to Ask Yourself Before Buying a Home
Buying a home can be emotional, but you have to focus on making a financially wise decision and do your due diligence.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
You found your "dream home," fell in love and are ready to sign the contract. Not so fast.
This is a huge investment, and perhaps a long-term commitment. So, step back, and ask yourself: What, if anything, stands between you and your dream home?
Here are three questions you should ask yourself before you make an offer:
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Does this purchase fit well with your financial goals?
Financial goals are unique to each individual. For some, buying a dream home could be a top priority. For others, providing for kids' college educations could be more important. For others, a financially secure retirement could be the number one goal.
So, the question is: What are your financial goals? And does the "dream home" fit well with your other financial goals?
A quick way to analyze is asking questions such as:
- Do I have enough reserves to cover my expenses if my spouse or I lose our jobs?
- If I buy this home, can I still save enough for my kids' education?
- How does this impact my retirement planning?
If you do not know or unsure about the answers to these questions, it is time to step back and reassess your readiness!
2. Can you afford it?
You must have thought about affordability before starting to look for the house. However, now is your final chance to do a deep dive and validate your real readiness. At the very least, the following three factors merit a revisit:
Check you have enough savings towards upfront costs.
Start with your down payment for the home. You should be prepared to cover at least 20% of the purchase price. Even if you find a lender who agrees to less than 20%, such arrangement could force you into less favorable loan terms and require you to pay for property mortgage insurance (PMI) to cover the lender's risk.
Next comes the infamous closing costs. These are the various miscellaneous fees you pay to settle your real estate transaction formally. While it is hard to predict these costs in advance, they typically range anywhere between 3% to 6% of the value of your home.
In total, you should expect about 25% of the cost of the home to come out your pocket, so that's how much you need to have liquid and readily available. Can you afford this upfront cost? Are you ready?
Ensure you have sufficient and sustainable cash flow to enjoy the home.
When I was buying my first home, I got this advice from a more experienced family member: "A home comes with a baggage of costs such as the mortgage, property taxes, home insurance, maintenance, repairs and the like. Pay careful attention to these expenses as this could impact your future cash flow."
Looking back now, after 20 years, I agree with her.
Your dream home comes with additional costs and is sure to change your household budget significantly. Using a worksheet, such as this one from Kiplinger, develop a new budget with a breakdown of home-related expenses. Once the budget is ready, check if your current income sources provide sufficient cash flow for your anticipated expenses. Finally, analyze how stable your sources of income are so you can sustain the expenses into the future and enjoy your dream home!
Check your credit.
The blueprint for your credit worthiness is your credit report. It contains detailed information on your past spending patterns, your history of paying back loans on time, etc. Your lender will thoroughly scrutinize this report before agreeing to provide you the loan.
So, to be on top of your game, obtain your credit report (you can do so www.annualcreditreport.com (opens in new tab)) and ensure it is accurate and has no red flags. If you find errors in the report, try to get them fixed as soon as possible. (Also see Free FICO Credit Scores for Everyone.)
3. How much of a tax break would you get?
It is true that buying a home could help you reduce your tax bill. However, the idea that mortgage payments and property taxes are always entirely deductible is a misconception.
For example, if you do not itemize your deductions and choose to take the standard deduction instead, you get no tax benefit from home buying. Second, even if you decide to itemize, only the interest portion of your mortgage payment is deductible, not the entire amount. Third, property taxes are not deductible in the alternate minimum tax (AMT) method of tax calculation. Lastly, home-related tax breaks are deductions, not credits. In other words, how much you save depends on your marginal tax bracket. (See Tax Breaks for Owning a Home.)
So, have you analyzed all these situations? Do you know if you itemize or take standard deductions? Do you know if you are exposed to AMT? Do you know your marginal tax bracket? Ultimately, do you have a reasonable idea as to what your tax break will be if you commit to this home?
If you are not sure about the answers to these questions, now is the time to do more research or seek professional help. Don't make your home-buying decision with an assumption that you get huge tax breaks.
So, what do you think? Buying your dream home can be emotional. Don't make a hasty decision without considering the financial consequences. Step back, analyze carefully and make a wise decision. Good luck!
Vid Ponnapalli is the founder and president of Unique Financial Advisors (opens in new tab). He provides customized financial planning and investment management solutions for young families with children and for professionals who are approaching retirement. He is a Certified Financial Planner™with an M.S. in Personal Financial Planning.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
ETF Funds for Anti-ESG Investors
A new crop of anti-ESG ETF funds offers an alternative to investments that focus on environmental, social and corporate governance issues.
By Kim Clark • Published
Stock Market Today: Stocks Finish Mostly Higher After First Citizens Buys SVB Assets
The Nasdaq closed lower, though, as mega-cap tech stocks declined.
By Karee Venema • Published
3% Mortgage Rates: Gift of a Lifetime or Low-Rate House Arrest?
A homeowner planning to relocate or downsize might find the higher costs related to higher mortgage rates too much of a hurdle to clear. What are their options?
By Adam Jordan, CIMA®, AAMS® • Published
Opportunity Zones in 2023: A Look Back, a Look Forward
Is now the perfect storm for investors? Don’t take your eye off the ball — investing in opportunity zones is well situated to offer meaningful tax benefits to knowledgeable investors.
By Daniel Goodwin • Published
Should I Sell or Rent My House When I Relocate for Retirement?
This decision isn’t easy, thanks to investment, tax and other considerations. Let’s explore the implications of each.
By Evan T. Beach, CFP®, AWMA® • Published
Publicly Traded REITs vs. Non-Traded REITs: What’s the Difference?
As REITs gain in popularity, prospective investors should understand the relative pros and cons between these two investment vehicles.
By Edward E. Fernandez • Published
How Commercial Real Estate Investing Can Add Balance to Your Portfolio
Volatile economic conditions and uncertainty have investors worried, but alternative assets could help improve returns while managing risk.
By David Wieland • Published
Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
DSTs can help investors successfully complete a 1031 exchange, achieve diversification, avoid expensive capital gains taxes and more.
By Dwight Kay • Published
Considering a 1031 Exchange? The Rules You Need to Know
Taxes are an inevitable part of investing in real estate. You can, however, defer or avoid paying capital gains taxes by following some simple rules of a 1031 exchange. Yes, you read that correctly!
By Daniel Goodwin • Published
Are Capital Gains Taxes Keeping You From Selling Property?
A structured installment sale could help defer or reduce long-term capital gains when you sell real estate.
By Lars Larsen, Investment Adviser Representative • Published