Remember the movie The Money Pit where a young couple struggles to repair a hopelessly dilapidated house that literally falls in around them? That 1980s slapstick comedy may not be funny for many first-time homebuyers dealing with unexpected bills that squelch the joys of home ownership. To avoid surprises that could move you from your dream house into the poor house, follow these suggestions:
#1. Get a home inspection. An ounce of prevention is worth a pound of cure. While home inspections vary dramatically from state to state, according to the National Association of Certified Home Inspectors, your home inspection should address:
Structural Elements: Construction of walls, ceilings, floors, roof, and foundation.
Exterior Elements: Landscaping, grading, elevation, drainage, driveways, fences, sidewalks, fascia, trim, doors, windows, lights, and exterior receptacles.
Roof and Attic: Framing, ventilation, type of roof construction, flashing, and gutters.
Plumbing: Identification of pipe materials used for potable, drain, waste, and vent pipes; and toilets, showers, sinks, faucets, and traps.
Systems and Components: Water heaters, furnaces, air conditioning, duct work, chimney, fireplace, and sprinklers.
Electrical: Main panel, circuit breakers, types of wiring, grounding, exhaust fans, receptacles, ceiling fans, and light fixtures.
Appliances: Dishwasher, range, oven, built-in microwaves, garbage disposal, and smoke detectors.
Garage: Slab, walls, ceiling, vents, entry, firewall, garage door, openers, lights, receptacles, exterior, windows, and roof.
Although your home inspection report will not describe in detail the condition of every component, it should note items that are defective or require immediate service. Serious problems that should be spelled out include: health and safety issues, roofs with a short life expectancy, furnace malfunctions, foundation deficiencies, and moisture or drainage issues. Keep in mind that you may need to hire an additional inspector with a specific license to inspect and address asbestos, radon, lead, mold, or rodents and other pests.
Naturally, it’s rare that a home inspector compiles a report without a punch list of items that need attention. While the seller may offer to address issues raised in the report, it’s often wiser to negotiate a price reduction and hire your own contractors so you can supervise the repairs.
#2. Get the right mortgage. Maybe you’ve experimented with mortgage calculators to determine how much mortgage you can afford, but as you become more serious in your home search, it’s a good idea to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage so you’ll know exactly how much you can afford. Shopping for a mortgage is like shopping for any other large purchase: you can save money if you take some time to look around for the best deals. In addition to offering different interest rates, loan programs and fees vary widely among lenders. Your real estate broker may be familiar with local lenders’ offers, or you can do the research by reading your local newspaper’s real estate section.
Your first choice will be to decide between a fixed rate mortgage and an adjustable rate mortgage (ARM). With a fixed rate, your interest rate stays the same for the term of the mortgage, which normally is 30 years. With a fixed rate mortgage, you always know exactly how much your mortgage payment will be. With an ARM, your interest rate and monthly payments usually start lower than a fixed rate mortgage, however they can move, either up or down, as often as once or twice a year. That’s because your interest rate will be tied to a moving financial index, such as the U.S. Treasury Securities index. While an ARM enables you to afford a more expensive home because your initial interest rate and monthly payment will be lower, you’ll need to budget for uncertainty in the future. To evaluate your options and determine which loan suits you best, ask yourself:
Do I expect my finances to change over the next several years?
How long am I planning to live in my home?
Am I comfortable with a changing mortgage payment?
#3. Plan for the full cost. If you are making the transition from renter to homeowner for the first time, there may be additional expenses you have not factored into your monthly budget. For example, if your utilities have been covered in your rent, you may want to ask your real estate broker to help you get information from the seller on how much they pay annually for heat and electricity. In addition, you might have to budget for homeowner association fees or condo association dues. Of course, you will also have to set money aside for property taxes and homeowner’s insurance.
#4. Start a home repair account. Remember Murphy’s Law? If something can go wrong, it will, and at the worst possible time. Accordingly, if your home inspection revealed a host of “problems waiting to happen,” it’s wise to establish and continue to contribute to an account designated for essential future home repairs. That way, when your furnace fails in mid-January, you won’t be left scrambling for the funds to fix it. Additionally, if you are new to the area and have not worked with local plumbers, electricians, or contractors, it may be a good idea to ask neighbors for referrals before you actually need these services.
#5. Protect your property. Your new home likely will be your largest asset, so take the time to protect it with the proper homeowner’s policy. While your homeowner’s policy protects your home from damage due to common threats like fire and smoke, lightning, theft, and extreme weather, be aware that there are also specific policy exclusions, such as flood damage. Read the fine print carefully. To cover the exclusions, you often can add endorsements to your policy or purchase additional coverage. Remember, too, that your personal property also is covered by homeowner’s insurance. Because there are limits for certain items that may not be sufficient to cover their replacement, you may want to purchase additional coverage for specific possessions. Additionally, because in the event of a fire or burglary recalling each item in every room can be difficult, take the time to complete a full inventory of your belongings, recording the serial numbers, as well as the dates and costs of purchases for jewelry, artwork, furniture, and major appliances. You might even consider making a video record. Store your records in a fireproof safe or away from your home. Finally, you want to ensure that your homeowner’s insurance provides appropriate protection for liability claims and medical expenses that could result from personal injury suffered by others. The standard amount of liability coverage is $100,000 on a typical homeowner’s policy; however, you may increase that amount by purchasing an umbrella policy.
While it’s impossible to predict every expense associated with your new home, a little advance planning can take the sting out of the unexpected and ensure that your “home sweet home” doesn’t turn into a money pit.
