Focus on Financials: Planning Your First Home Purchase

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With the spring season upon us and the real estate market starting to heat up, you may be getting the itch to live “the American dream” and make that first home purchase.

Whether you’ve been renting in the past or are just coming up on graduation and already putting together your next steps and strategies, there are a number of factors to consider that make the first-time home buyer a bit more unique for an optometrist compared to everyone else.

To make sure that you’re living a dream instead of a nightmare, consider the following ideas and thoughts as you evaluate the possibility of purchasing your first home.

Don’t Outkick Your Coverage

Or, to put it another way, don’t be “house rich and cash poor.”

Make sure you understand the totality of your financial situation, including your personal balance sheet of assets and liabilities as well as your income situation. If you’ve been renting and something goes wrong, you’re used to making a simple phone call to the leasing office to have the repair completed.

Now, as a home owner, you’ll be responsible for the coordination and payment of ALL repairs on your home.

Understand Explicit Costs

In addition, most homes that are purchased by optometrists tend to have more square footage than apartments. Medical designations after one’s name can make some mortgage brokers and realtors salivate with the opportunity to upsell a home to a medical profession such as an optometrist, but make sure you understand the implications of your decision to purchase a larger home.

More square footage equals more stuff.

More stuff equals more dollars spent on that stuff.

Or, if you don’t have the dollars, an empty house with a lot of extra square footage. Which begs the question…why the purchase in the first place?

A general, conservative rule to live by is to not overleverage yourself in house payment compared to your TAKE HOME pay. Generally, we like to see this number stick somewhere between 25-32% of your after-tax/take home pay.

And when we’re talking mortgage payment, we’re not just discussing principal and interest.

A mortgage payment consists of the principal and interest, but also includes your escrow payment.

Your escrow account is used as a “holding account” and the funds in that account are used to pay your real estate taxes, your insurance, and possibly your PMI (private mortgage insurance).

PMI is paid by the borrower when you finance more than 80% of the home’s value. Or, another way to look at it, any PMI that you pay will disappear once you have at least 20% equity in a home.

Lastly, understand if the home you’re looking to buy is in a neighborhood that is part of an HOA (homeowner’s association).

Be sure to understand and ask for a copy of the covenants that govern the HOA as well as annual dues for the HOA, which are required if you purchase a house in the neighborhood.

Have a Down Payment

There are multiple reasons why having a healthy down payment is a good idea when purchasing a home.

The first reason is that it will reduce your mortgage payment.

The more cash you put down on the purchase, the lower your mortgage will be, which means your payment will be lower. Mortgage calculators on lending websites such as this one can help you calculate how your monthly payment will be affected based on the amount of your down payment.

It also reduces or eliminates your requirement to pay PMI. This is why most advisors and lenders will encourage you to have a down payment of at least 20%—no PMI if you have at least 20% equity in your home!

Another reason is that is proves to both yourself and your lenders/creditors that you’re able to follow and stick to plan that takes some time to implement and accomplish.

Most people don’t wake up and have a lump sum of money sitting in their bank account to use as a down payment.

By running the numbers, coming up with a goal of a down payment, and then systematically saving to reach that number, you’re not only demonstrating and building the habit of delayed gratification, but you’re also demonstrating that you can be responsible and non-impulsive about your decision making process—all good qualities to have as a homeowner.

Plan for Your Guests

No, I’m not talking about your parents, siblings, friends, or OD colleagues. I’m talking about those student loans that will most likely be occupying one of your spare bedrooms for the foreseeable future.

Be sure to include in your calculations your monthly student loan payment as well as any additional debt reduction strategies that you’d like to implement to reduce your student loan balances further.

Home ownership can be a very rewarding, fulfilling, and enjoyable experience. However, done prematurely or un/ill-informed and it can turn into more of a nightmare than a dream.

Make sure you are proactive, diligence, and steadfast in your approach to home ownership. Just as the roots of a plant require time to take hold, so too do your roots as a homeowner.

Adam Cmejla, CFP®, CMFC® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and President of Integrated Planning & Wealth Management, LLC, a comprehensive financial services firm focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve. Contact Adam at 317-853-6777 or adam@integratedpwm.com.

About Adam Cmejla

Adam Cmejla
We are an independent financial services firm who work with people looking for an established process instead of a random product. We bring a sense of calmness and discipline while creating an honest, unbiased client experience utilizing the perfect combination of the science of financial planning and the art of personal relationships. We specialize in serving clients throughout the country who are optometrists, dentists, and pharmacists.

2 comments

  1. Alisa Nola

    Thank you for the valuable information! One other thing that I was not aware of until I met with my realtor agents, is that some states have first home buyer programs that can actually cover (or reduce) the amount of your down payment. Some programs also give a tax credit yearly for the life of the loan. I would recommend asking an agent for more specifics.

  2. Adam Cmejla

    Great tip and suggestion, Alisa! Thanks for sharing!!

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