How to successfully transition from renter to home owner
Congratulations! You’ve finally reached that point in your life where you plan to be in the same place for longer than a 12-month lease. Instead of making those pesky rent payments on a monthly basis, you want to earn equity each month and eventually end up with a permanent roof over your head. Becoming a home owner is absolutely worth it; but it’s crucial that you are prepared for the differences between renting and being a home owner.
But rent doesn’t simply translate into mortgage payments on a 1:1 ratio — quite a bit more goes into the transition from renter to home owner than you might think, from the upfront costs involved to what happens if your dishwasher malfunctions and spews food-flavored water all over your floor. As you prepare to “pick up the torch” of home ownership, keep these five things in mind, and you’ll be just fine and be stoked you went from a renter to home owner.
There’s a lot more to pay for upfront
Say goodbye to making your security deposit and calling it good. When you buy a house, there are a few different costs that await you. The biggest one (usually, unless you have a zero-down mortgage), which poses one of biggest obstacles for hopeful home buyers, is the down payment. The amount you need depends on your mortgage program, but expect to pay between 3% to 20% of the purchase price of the home. If you don’t have the money for a down payment, there are options to pay much less upfront — sometimes as little as 3% (and sometimes ZERO down) — with private mortgage insurance or a loan through the Federal Housing Administration (FHA). These lower down payments, however, make for higher monthly payments and a higher home price overall.
And then there are those dang closing costs, which average about $2,100 on a $200,000 home. These “closing costs” often covers several necessities: home loan origination, title insurance, land surveys (if applicable), home inspection, insurance escrow, appraisal, and more.
Monthly payments go beyond mortgages
Monthly, your mortgage payment can look pretty similar to your rent check. In fact, a recent study found that in the vast majority of states, being a home owner and making a mortgage payment is easier on your pocketbook than renting.
Your home is most likely your largest investment, so you’ll want to protect it with insurance (duh!). Sure, renters’ insurance was “highly recommended,” but homeowners insurance is absolutely necessary to protect your investment, your belongings, and your mortgage. In fact, pretty much all mortgage lenders require it. Don’t worry though, the homeowners insurance payment will be wrapped into your one single mortgage payment.
And lastly, you’ll want to tuck away money each month for property taxes, which is usually a percentage of the assessed value of the land and the structures on it. These rates are highly localized, but the average household pays just over $2,000. Here’s the good news; Although property tax is generally billed by your County on an annual or semiannual basis, your mortgage payment will include enough to put money aside in an escrow account to pay your property taxes automatically when that bill becomes due.
If you don’t have your emergency funds set aside yet, now is the time
Setting aside a good sized “emergency fund” isn’t specific to homeowners, but it’s even more important as a home owner. The bare minimum recommendation is to have at least three months of living expenses to fall back on — rent, food, utilities, and every other expense you have — but six months is better. Some even go so far as to recommend two years’ worth, which is definitely something worth aspiring to, but not an easy task. These funds will protect you in the event of job loss, appliance failure, or major medical bills. Imagine how much less stressful your life would be if you knew that you had 3-6 months of expenses in the bank, just in case something crazy happens!
You are your own maintenance crew
Your maintenance budget now must cover more than lightbulbs and smoke detector batteries. Aside from the emergency funds you’ve saved up, you’ll want to plan on spending at least 1% of the home’s value on maintenance projects each year. When you move in (and pretty regularly after that) take stock of the appliances you have and what kind of shape they’re in to prioritize upgrades and service. When was your furnace last inspected? Is the water heater an original from the 70’s? Price a few out and put that water heater near the top of your list — above, for example, an air conditioner or dishwasher. If unused, this maintenance cash will come in handy for larger projects, such as a roof replacement.
More regular maintenance is required of you as a homeowner, too. That yard you’ve been dreaming about — it needs to be mowed, often. And that means you need to have a lawnmower. Still doesn’t look as naturally manicured as the neighbors’ yard? Pick up a weedwacker to and clean up those edges. Depending on where you live, you’ll also need a rake come fall (and leaf bags or a tarp to move leaves to the curb), and a shovel and de-icer come winter. Plan ahead: You’re going to want that shovel before the snowy December morning you need it.
Your neighbors are forever (or at least for quite a while)
This one is the easiest change to make when going from renter to home owner, and probably one of the most fun. Your neighbors are no longer unseen producers of endless stomping on the other side of your ceiling — they’re your allies in the mission to create a great place to live. You don’t have to bake banana bread before you go, but you should go introduce yourself and get to know them and their lifestyles a little bit (which is a good thing to do even before you buy). Before you deny their requests to turn down your music at 11 pm — or too aggressively ask the same of them — just remember that they’ll still be there the next day. And the day after that.
Moving from renter to home owner can seem daunting and complicated, but if you know what to expect, it’s a much less stressful transition. And if you’re working with professionals in the real estate industry, such as Dustin Brohm, they’ll walk you through the specifics of your situation and get you moving in the right direction.