NEWS: Even with mortgage rates going down, buying a home is more expensive than it’s ever been in New Hampshire.
WHAT THIS MEANS TO YOU: If you want to buy a home, you need to start preparing now.
We all have our comfort TV shows and, this winter, weirdly, I’ve been binging “My Lottery Dream Home,” which is available on several streaming services. If you’re not familiar, the host, designer David Bromstad, guides lucky lottery (or settlement, or inheritance) winners in buying their “dream home.” The featured person or family looks at three homes suggested by local real estate brokers, David walks the lottery winner through the homes as they talk about the pros and cons. At the end, the person decides which home they’ll buy.
It’s fun if you like that kind of show. You get to see different kinds of houses, which I’m always nosey about, all over the country. It’s fun to fantasize about what kind of home you’d buy if you won the lottery. One thing the show isn’t, and I understand this fully even as I watch it, is a realistic home-buying guide.
Odds are, few of us will win the lottery, no matter how bad our scratch ticket habit is. And no, this is not a judgy column on how “financially irresponsible,” it is to buy scratch tickets. Buy them if you want to. I do occasionally. We’ll talk more about it in a future column about assessing financial risk.
Today’s column is about what you should consider if you are buying a house. It may surprise you that almost nothing on “My Lottery Dream Home” qualifies.
This column is not meant as a critique of the TV show, but we will still look at what you need to consider when buying a home, or even just dreaming of it, through the lens of what happens on MLDH. You don’t have to watch the show, by the way, to understand these concepts.
1. How much are you willing to spend?
David Bromstad, the host, asks each lottery winner this question at the beginning of the show. Some have won a “small amount” like $100,000, others have won millions. We can assume that no matter how much they won, many of them won’t be paying the fill price of the home in cash, but will be making a [hopefully hefty] down payment and taking out a mortgage for the rest.
People often give a dollar figure for their max amount, say $500,000. Or a range, like $350,000 to $450,000.
When you’re considering how much to spend on a home, though, the price of the home is only part of the calculation of what you can afford to pay. You will never hear the mortgage interest rate, property taxes and insurance discussed on MLDH, but they are vital when considering what you are willing to pay for a house.
What you must consider is how much you can afford a month. Let’s say you want to buy a home that’s $480,000, which is close to the median price of a home in New Hampshire these days. For the sake of the exercise, let’s say you will make a 20% down payment of $80,000. To figure out if you can afford that home, you must also ask questions that on one on MLDH ever asks, at leat on camera:
What’s the interest rate on the mortgage? The interest rate will play a part in determining your monthly payment. If you get a 30-year-fixed-rate mortgage for $400,000, with a 7.5% interest rate, the going rate for someone with a credit score of 700-719 in the state, you’ll pay $2,797 a month. If the interest rate was 6.5%, you would pay $2,528 a month. If it was 8.5%, you’d pay $3,076 a month. As you can see, interest rate can mean paying hundreds more or less a month. The better your credit score, the better the interest rate.
What are the property taxes in the town where you’re buying the home? New Hampshire has the fourth-highest property tax rate in the U.S., the price Granite Staters pay for not having a state income or sales tax. The median is more than $6,000 a year. Median means half of the people pay more, half less. In any case, except to pay thousands a year in property taxes, which will likely go into escrow and be paid by your mortgage company, or you can pay yourself. Some towns and cities have higher property taxes, some lower. Take this into consideration when looking at homes.
How much is your home owners insurance? The amount of insurance you pay is based on many things. Obviously, the appraised value of the home is a big one. But your credit score also has an impact on your rate, as do where the house is located. On top of that, if you’re in a flood plain, as determined by the federal government, you’ll also have to get flood insurance before you can get a mortgage.
What are the energy costs? I’ve watched 13-plus seasons of MLDH, and I think one home-buyer out of all those shows has mentioned the energy costs for a home. People walk into a potential home and say, “Oh! I love these cathedral ceilings!” and all I can think of is how much more it’s going to take to heat that room. I guess I’m no fun, but in New Hampshire, how a home is heated will play a part in your monthly costs. Find out what type of heat the house has and pay attention when the home inspector tells you whether it’s well-insulated or not. You can ask the seller to provide what their energy costs are, some mortgage lenders even require this. Also ask how old the furnace or heating system is, because that will have an impact on efficiency and also whether you’ll have to replace it at some point. Ask, too, about the windows – when they were last replaced. That will have an impact on heating and cooling as well. It may be boring to think about this stuff, but you’ll be glad you did when the monthly bills come in.
Private mortgage insurance. If your down payment is less than 20% and you are getting a traditional mortgage (rather than a VA loan), you will have to pay private mortgage insurance until you’ve paid the equivalent of 20% of your mortgage (including the down payment that you made). PMI can range from 0.22% to 2.25%, with higher rates for larger mortgages. And, as with so many other things, your credit score will also factor into the rate. This is another cost to add to the monthly payment and something to consider when looking at a home’s price tag.
2. How many bedrooms and bathrooms?
This is definitely an important consideration, particularly if you have a family, are planning to start one, have a parent living with you, or others who will live in the house. But, given the price of a home, it’s also important to consider needs versus wants. Yes, it would be great for each kid to have his or her own bedroom. But if it means busting the budget, do what makes sense financially. The same goes for bathrooms. You may dream of a master suite with a soaking tub, walk-in shower and double vanity. But if you have to continue to share a bathroom with the kids for $1,000 a month less, maybe you want to suck it up and do that. Hubby want’s a “man cave”? How about a divorce cave for when you can’t pay the mortgage because you paid extra for a house with one more room that you needed just so he had a place to disappear to and not engage with the rest of the family? [Sorry to all the man cave fans out there for the rant, but come on. Really?]
3. How much square footage?
People often give David a square footage estimate of what they want. In some ways, that makes sense, since a family of six in a 900-square-foot home would be a tight fit. But it’s more important to make sure the house has the elements you need space-wise, instead of pulling an arbitrary number out of the air and sticking to it. Keep in mind, the square footage will have an impact on your property tax cost and home owners insurance, as well as related costs like heating, cooling, electric, window replacement, interior and exterior painting and roofing. The bigger the house, the more it will cost you in many ways.
4. We want a place where we can entertain!
While it’s great to host family parties and be a gathering place for all your scads of friends, keep in mind that the important thing is to consider how the house works for you 24/7, 365 days a year. And how you’ll pay for it. If you are looking for a dining room big enough to host Thanksgiving, or a living room big enough to have everyone over for a Super Bowl party, think hard about how often you will need that amount of space. It’s a fun thought, being the host and hostess with the most and mostess, but don’t pay for a bigger house than you need based on entertainment needs. Instead, base it on the reality of your day-to-day life and what you can afford. If you have a big family living in the house and need the space, yeah. If you only need that much space a few times a year, buy the house you can afford and find a way to jam folks in when you entertain.
Sometimes a house on MLDH has a big dining room just feet away from a kitchen with a large eat-in area, and I always think, “Why have two places to eat?” You may have good reasons to have two places to eat just feet away from each other. Just make sure that if it’s the difference between paying for a house that will bust your monthly housing budget, the reason is worth it.
5. I love/hate these cabinets and countertops!
Don’t not buy a house that’s otherwise a good fit because it doesn’t have the “white kitchen” or granite countertops you’ve dreamed of. David always tells people that it’ll be easy to make cosmetic changes. If you have the money, yes it will. But even if you don’t, you know what? A faux oak kitchen cabinet works just as well as a white one. A non-granite countertop works just as well as granite and is easier to repair if, with all that entertaining, someone chips or cracks it. Those granite countertops also push the list price of the house up, at least a little. When you look at the kitchen, look at whether there is enough counter space and cabinets for your needs, whether the layout seems efficient and if there’s room to use it the way your family uses it.
6. We want a pool!
Particularly since you live in New Hampshire, weigh the fantasy of having a pool against the reality. Energy costs, time spent maintaining and cleaning it, and added insurance liability will all increase your monthly bills.
7. How old is the roof?
I have yet to hear anyone on MLDH ask this question. Roofs, though, must be replaced and maintained, which costs thousands of dollars. As with anything else that’s not going to last forever, find out how old the roof is and how long you can live in the house before it will cost you money, and factor that into your decision.
8. I want a home that will make a statement.
I guess if you’ve won $7 million in the lottery, you can go for it. Some of the big winners on MLDH want a palace, and David often encourages it. “You’re a millionaire! You need to live like one!” Right. If you’re going to be squeezing out a monthly bill, pay less attention to curb appeal, wowing your friends and family and making a statement to the world, and more attention to what will be a practical good decision.
There are definitely things to consider in being specific about what type of home you want. If you’re getting older, or have physical challenges, one-story living is a good idea. If you aren’t big on yard work and don’t want to shovel snow, consider a townhouse or a condo. If that’s the case, be sure to ask what the monthly homeowners association (HOA) fee is. But if you hate a certain style of house just because you have never liked that style of house—say, split level—and the one house that fits your budget is that style, then strongly consider whether you can have a change of heart rather than pay more for a house of a different style.
9. You’re not on the show and you didn’t win the lottery.
This would be most of us. Don’t feel though, that buying a house, even with today’s outrageous and ever-climbing prices, is out of reach. You are likely already paying for housing with your rent, so you are in the habit of accounting for a portion of what could be a mortgage in your monthly budget. [If you’re living with Mom and Dad, start paying them rent even if Mom won’t let you, just to get used to doing it and to living on a budget. Seriously. And if Mom STILL won’t take the money, but it in an interest-bearing account you can’t access and save for a down payment.]
The benefit of owning a home, even if it’s a studio-sized condo, is that you are building wealth. Historically, it’s the one way that people with little money or generational wealth have had to climb up the economic ladder, even if just one or two rungs. Every mortgage payment you make builds equity in your home, so that eventually it will be a financial asset. [Equity is the amount your home is worth, minus what you owe on it. So, if you buy a $250,000 home and owe $200,000, you have $50,000 in equity].
It’s never too early to prepare to buy a home. The earlier you start, the faster you’ll get there. The most important way to prepare is financially, which includes:
- Create and live with a monthly budget, including putting money into savings for a down payment.
- Work on improving your credit score. The better your credit score, the better interest rate and deal on home owners insurance you’ll get.
- Pay down credit card debt. A big factor in getting a mortgage is debt-to-income ratio (DTI). This is what you owe on debt monthly versus your gross monthly income [income before taxes and other deductions]. Lenders generally like to see DTI at 40% or lower before they’ll approve a mortgage. Some will allow a higher DTI if your credit history and income look good, but expect to pay higher interest, too.
Aside from shoring up your finances, find out what you have to do to own a home. New Hampshire Housing has all sorts of resources on its website that will help you figure out how to get your journey started.
If you already have some money saved and a decent credit score, but still think a home is out of reach, talk to someone at your bank or credit union about where you stand. They’ll be happy to take a look at your finances and tell you what you need to do. There are also online mortgage lenders, but I’ve bought two houses, and can’t say enough about building a relationship with a local lender who knows your area, will grow to know you, and can be there to guide you. We’re lucky enough to live in an area with great local banks and credit unions, and a sense of personal connection and community that goes a long way when it comes to making the biggest purchase of your life.
You may even be in a position to get pre-qualified for a mortgage, which gives you an idea of how high the lender is willing to go based on your finances. This isn’t pre-approval, but just a figure you can work with. If it’s not as high as you’d like it to be, the lender can tell you what you have to do to increase it.
If saving money, cutting down on credit cards and all the other tough stuff seems too hard, find a way to motivate yourself. I know it’s corny, but creating a vision board or putting a photo of a home you’d love to live in on the refrigerator can help keep you on target. If you have kids, get them involved in the journey. Ask them what they’d like in their own home, and have them do their own vision boards. Buy-in from the family can go a long way when it comes to budgeting and cutting expenses, which, let’s face it, are the biggest factors toward reaching home-buying financial goals. The kids may even have expense-cutting and motivational ideas you haven’t thought of.
If you’re single, or a couple, consider going in on a home with a sibling or friend. I know this is a slippery slope, but if you think it through and talk to a lender about the ins and outs, it may be a great solution. Of course, everything in this column still applies, only double. With the right partner, it could be a lot of fun.
Buying a home may be less out of reach than you think. You don’t have to resort to the scratch-ticket and fingers-crossed plan, which despite MLDH, isn’t a great bet. Find out what you need to do and go for it.