Home sweet home: Top tips for first time homebuyers

Ready to buy your first home? Homeownership is a wonderful way to help build security and potentially increase your net worth later down the line. There are some essential things you will need to know before you go to market. Preparation is key to move you from daydreaming to living your dream. So, what has changed in this year?¹

I am sure you are aware of the economic challenges we have all been experiencing the past few years. Inflation and high interest mortgage rates have been dominating the headlines. As we come to a close this year, a lot is beginning to change, and we are watching mortgage rates drop providing some relief. In addition, although home prices are at an all-time high, with more homes going up for sale and when you find your home, you’ll see an easing of competitive buying pressure.

And be sure to do your research and educate yourself about all of the market changes including shifts in real estate commission structures.¹ There are pros and cons to everything, and homeownership is no different, however, some people would agree that over the long-term, owning a home has potentially more benefits than not.

Let’s take a look.

Pros and cons

When considering buying a home, there are things to plan for such as potentially high upfront costs. You’ll need to have a down payment and closing costs on hand. Once you own, you’ll be responsible for property maintenance and know that taxes, insurance and things like HOA fees can increase. With that said, there are positive benefits to owning such as potentially more financial stability, personal freedom and overall quality of life.

You can enjoy a predictable fixed mortgage payment that can build equity with every monthly payment which essentially helps build a financial asset. Over time, homes generally increase and appreciate in value — providing you with a potential return on your investment. Your home can also function as a financial safety net by allowing you to borrow against the equity if needed, which in turn can preserve other savings such as retirement. The home can create an income stream when renting the property, and if you sell it later, can potentially enhance your future financial health as you enter retirement.

So where to start?

Know where you stand financially.

Buying a home is likely one of the largest purchase investments you’ll make. To know how much you can afford; you’ll need to check in with yourself. Financially.

• How much debt are you carrying? You’ll want to pay this down before buying. 
• What is your credit score? The higher your score, the more cost saving options you may have by way of lower interest rates or fees. This also applies to your partner or spouse or anyone else co-signing for the loan.
• How much income do you have? What is a comfortable monthly payment that is reasonable for your (or combined) income?
• And finally, how much down payment have you saved? Building a new budget can help you organize your finances, help you pay bills on time and, reduce expenses so you can save more.²

As a first-time homebuyer, be sure to ask about programs that will allow for less money down. You may also consider saving for emergencies so you have insurance should anything happen to your job after you sign on the dotted line.

And now for some other money caveats … borrowing from yourself

Borrowing from a retirement plan to fund a down payment is becoming increasingly popular. It can be a great tool, but you need to be aware of the risks.

Let’s start with the advantages:

• You can lock in low mortgage rates: you’re securing today’s rates
• Pay interest to yourself: typically, 1-2% above the prime rate
• Extended repayment period: up to 15 years if your employer allows
• No impact on debt-to-income ratio: generally, a 401(k) loan isn’t counted when applying for a mortgage

Here's what to watch out for, it can cost you:

• Repayment risks: If not repaid, it can be treated as a taxable withdrawal, with taxes and a 10% penalty if under 59½
• Job loss: You may have only 60-90 days to repay if laid off or fired
• Reduced retirement growth: Less money in your plan means a smaller nest egg and potentially working longer
• Double taxation: Repay with after-tax dollars and pay taxes again on withdrawals in retirement
   

The adage is true: good things take time, so saving separately for your down payment while your retirement savings is potentially earning in value may be a good route for you.

Once you have a roadmap in place you can find a realtor who will help you navigate the rest of the buying process that includes: getting competitive mortgage loan pre-approvals, helping you house hunt, assisting with making an offer and writing contracts, getting a home inspection, negotiating any home repairs with the seller, getting bank appraisals, taking you on a walk through the days before signing and finally will guide you to closing.

A solid foundation

Owning a home is a major undertaking, so it’s important to know all the facts before getting in over your head. Consider speaking with a financial professional on how to best plan for your next big investment.