BY MIA MORALES
Buying a home is a big step for new graduates. The responsibilities of school can definitely be hefty, but buying and maintaining a home is a different kind of challenge. Here we will take you through some tips when preparing to buy a home after graduation. These are by no means comprehensive, but are a useful guide that will make home buying a bit less daunting.
Consider All Relevant Cost
A house has multiple costs. Unless it is purchased with 100 percent cash, a fraction of the home price will be financed through loans. These loans carry monthly payments that have to be met in order to remain in good standing with the lender. Homes are subject to property taxes that add to overall homeownership costs. Lastly, homeowner’s insurance and a home warranty are valuable services to have. For quality coverage, those will add a bit to overall monthly homeowner costs.
Every month, the principal and interest components of a home loan will skew more and more towards more principal and less interest, thereby giving you equity; actual “ownership” of the real estate. However, note that a significant fraction of what you pay to own a home does not correlate to direct ownership: loan interest, taxes, and insurance do not translate to ownership but are nonetheless necessary. New buyers should be aware of what exactly the “ownership” consists of so they do not get unrealistic ideas regarding how quickly they will build up equity.
Reduce Total Debt
When starting the home buying process, keep an eye on total outstanding debt and credit score. Credit score is a composite rating that, in theory, rates people according to the risk they pose to a prospective lender. An important variable is outstanding debt. Even though students often hear that school loans are “good debt”, they are still obligated to make payments to eliminate that debt. If school loans are high in relation to income, it can make home loan lenders wary. This may result in denial of a loan or, even if acceptance, a high interest rate that works against the homeowner.
Examine Homeowner Benefits Math
Tax law allows you to deduct mortgage interest if you choose to itemize deductions. This may seem enticing since you’re “negating” part of the expense through tax benefits. Let’s take a closer look. Assume someone filing single, they have the option of a standard deduction valued at $6350. For this example, assume assessed home value of $150,000 and property taxes totaling $4000 and state taxes totaling $2000. At this point, you would need at least $350 in annual mortgage interest to make itemizing deductions worth it. This is not a hard target to reach since every year except the last will entail over $350. This is good news for homeowners.
Before buying a house, “run the numbers” with more detail than shown in this bare-bones example. Maintenance expenses, association fees, insurance and security systems as well as changing tax law can throw a curveball into rosy assumptions about the benefits of buying a home. These kinds of variables should be examined prudently and with a professional, if possible.
Envision Selling or Renting It
Selling or renting the property should remain in the background even during the buying stage. Likely buying market now and in the foreseeable future is very important to anticipate. Major employers and local/state politics can also greatly alter the value and appeal of your property for better or worse.
Buying a home after graduation is a significant and impressive step. It is fraught with some challenges, difficulties, assumptions, and risks; nonetheless the benefits that accrue often make the hassle worth it. To succeed here, do your homework and don’t get caught up in emotion when judging the future costs and value of your home.
Bio: Mia Morales is really passionate about health, nutrition, and what she puts in her body. When she’s not writing, you can find her with a glass of mint lemon water and a child on each hip. Who says mom’s aren’t super heroes?