25 Dec Preparing For Your Future Now
Many first time home buyers fall into the trap of buying something now with the intention to sell in a few years and get a larger home. What many home owners don’t realize is one of the largest expenses of owning a home comes on the day you sell it! Selling your home could cost you 5% of the value plus an addition $2000-$3000 (this includes Realtor, title, legal, and transfer costs).
The best advice we give first time home buyers is: PLAN AHEAD. We know it’s hard to predict the future, but we can help you walk through scenarios to understand the benefits of looking a little further down the road.
Let’s look at an example. Bob and Amy are recently married and have plans for a family down the road. Based on where they are today, they are thinking a 2 bedroom/1 bath condo or townhome would be good for now. They can sell in a few years and get a larger home when they need it.
Here’s a typical cost comparison of a condo vs a single family home.
2 Bed/1 Bath Condo 3 Bed/2 Bath Single Family
Purchase Price $135,000 Purchase Price $185,000
Payment (PI+MIP) $779 Payment (PI+MIP) $1090
Association Dues $150 Association Dues $0
Real Estate Taxes $333 ($4000/yr) Real Estate Taxes $458 ($5,500/yr)
Insurance $25 Insurance $75 ($900/yr)
Total/month $1287 Total/month $1,623
Looking at the scenario with a focus on today, you might think the 2Bed/1 Bath Condo is the best choice. But let’s fast forward 3 years, when it’s time to sell and get a bigger home. To keep it simple, we’ll assume there are no changes in the market.
By not purchasing the larger home, Bob and Amy have “saved” $336/month over 3 years for a total of $12, 096. But, to sell their 2 Bed/1 Bath home, it will cost about $9,750 (Realtor commission, insurance, transfer and legal fees). The cost to sell brings their total savings to $2,346 – less than $800/yr and basically $65/month.
In this example, factoring the cost to sell the first home, the larger home would actually have a new cost equivalent to an additional $65/month. Considering Bob and Amy’s tax situation, the extra monthly expense could very easily be the amount they could write off for the additional tax interest monthly MIP.
Looking down the road, it would be likely they would benefit from more space and the 3 Bed/2 Bath home would have been better suited for them as their first purchase.
Each home owner’s situation is different. However, every homeowner could benefit by thinking at least one home purchase down the road and calculate their actual savings (or cost) of buying less home.
There are circumstances where buying a smaller home is more cost effective and circumstances where it is more expensive. The costs or savings are never just the amount of the payment. The future transaction costs incurred at the time of sale must be factored in when doing the cost benefit analysis and choosing which home to buy.
Factors to consider in each transaction:
- What will it cost me to move when I sell?
- What will my life and family be like when I am trying to show and sell my house? What is it worth to me to avoid that?
- What will it cost me to keep up a single family detached home as opposed to paying a town home or condo association to do it for me? Is the type of work a joy or a burden to me?
- What is certainty worth to me? What will it mean to me if prices go up when I want to buy my next home? What will it mean to me if prices go down when I need to sell? What if rates are higher when I need to move?
- What if income tax laws change (i.e. the home interest tax deduction goes away?) Will I still be pleased with my choice?
Thinking all these things through is something even the savviest first time homebuyers are often ill-equipped to do since they have never been through this before. The staff at Two Roads Lending has been through hundreds of scenarios and is ready to listen to your unique situation.
Call us to start the conversation. We can help you find the scenario that is best suited to your needs now and into the future.