Home Ownership: What to Know, How to Prepare

Purchasing a home is a life-changing and exciting event for individuals and families alike. Imagining what you’ll do with your new space, whether it’s the yard, the bedrooms, or the kitchen, adds to the excitement of homeownership. Once you’ve decided to buy your first home, it’s important to know what to look at and watch out for. Here are some questions to ask yourself early in the process:

Will I live here for five years or more? 

According to insurance comparison site The Zebra, the average length of homeownership is 8 years. This means you are likely to recoup the money spent on the down payment and other expenses if you eventually sell your home. However, if you stay for less than five years, you may find that you spent more than you’ve gained from the sale. Remember that during the homebuying process, you will need to pay for several expenses such as a 3-20% down payment, closing costs, moving, new furniture, appliances, and any necessary modifications or repairs. If you think you might move again within five years, it may be more cost effective to continue with your current living situation.

How much money will I need to put for a down payment?  

Depending on whether you qualify for the first-time homebuyer program, receive a grant, and/or other benefits to help you purchase your first home, it is very likely you will need to provide a 3-20% down payment. Though each state is different, the median price of a home in the United States is $416,900, which means you would be responsible for a down payment anywhere from $12,507 (3%) to $83,380 (20%). While 3% is more affordable, you should understand the implications. Putting down anything less than 20% towards your home will result in the lender requiring that you purchase private mortgage insurance (PMI). PMI adds to the cost of your monthly bill; it does not reduce your principal. It is there to protect the lender in case you foreclose on your home.

How safe is the neighborhood? How good are the schools? 

Areas with high crime and poor performing schools can negatively affect the quality of life in your community and the value of your home. Do some research ahead of time. Dig into local crime statistics and school ratings, as these factors can significantly impact your experience as a homeowner and your property’s long-term equity.

What is the risk of a natural disaster? 

When you buy a house, you will want to buy both homeowners insurance and a homeowners warranty. Homeowners insurance helps protect your home against damage, theft, and certain needed repairs, but it does not cover every major natural disaster. That’s why you may need to purchase additional insurance for events like earthquakes or floods. A homeowners warranty can help cover the costs of other items in your home, such as appliances (e.g. washer, dryer, refrigerator), light fixtures, and home systems (e.g., air conditioning, heating, plumbing). Depending on your state’s disclosure policies, you should be informed if your home is in a high-risk flood zone or near a fault line.

Which is better: actual cash value or replacement cost? 

Once you purchase and move into your home, you’ll want to ensure that your belongings are covered. If something needs to be replaced due to burglary or damage, ideally, the only cost to you would be the deductible. This is why understanding the difference between actual cash value and replacement cost is essential.  

Actual cash value reimburses you for items if they are destroyed or stolen, minus depreciation and your deductible. Let’s suppose your $5,000 TV purchased four years ago is stolen and you file a claim with your insurance company. They will consider the age and wear of your TV. After subtracting your deductible (e.g., $500), they may only pay you what they believe it’s worth at the time of loss, perhaps around $2,000. On the other hand, replacement cost coverage may pay you up to the full $5,000 to purchase a new TV. When deciding which coverage to buy, consider your budget and risk tolerance. Keep in mind that although the replacement cost option may lead to higher monthly premiums, it may be more cost effective in an emergency.

Before you purchase a home, do your research on government programs and resources at the federal, state, and local levels that may be of assistance. Knowing your options not only makes the buying process smoother but can also save you money. When you’re ready to buy, remember to seek out professional advice when needed. Their guidance could prove invaluable as you make one of life’s most significant decisions.

Samuel Molina is an Accredited Financial Counselor® and CEO and Founder of The Academy of Financial Education, a non-profit organization dedicated to narrowing the wealth gap for its community through activities, coaching, education, and instruction. Visit Samuel’s FindAnAFC profile to view his services and connect with him on LinkedIn.