Taking the starter home leap
What to consider when buying your first house
You’re getting closer to being a firsttime homeowner. But are you financially ready? Here are five questions to help you determine if you’re prepared to make that commitment.
1. Have you accumulated enough assets?
The down payment and closing costs are only the start of financing your dream home. You may be faced with storm damage, replacing the boiler or even losing your job. “You’ll want to have a healthy cushion to weather unexpected financial challenges,” says Beth Lawlor, head of field engagement for banking and lending of UBS Wealth Management. “Your reserve should at least cover at six to 12 months of mortgage payments.”
2. How long do you plan to be in your new home?
Maybe this is your starter home. If you anticipate a change of lifestyle and moving to another house in a few years, you may want to consider an ARM interest-only (IO) mortgage, suggests Chris Kanavos, Director – senior wealth management banker for UBS Wealth Management. Principal repayment doesn’t begin until several years down the road. With the average mortgage lasting 5½ years, locking in on a 30-year fixed at a higher interest rate may have you paying a premium, especially in a first home. “An IO mortgage gives you flexibility over when you pay the principal and control over tax deductibility of mortgage interest. That frees up cash flow that could be used for things like your kids’ tuition or other large expenses,” Kanavos says. Another option is a Principal and Interest mortgage with an adjustable interest rate (ARM). The rate resets periodically after an introductory period. “Parents may want to cover the down payment on a child’s first home, by pledging securities held at UBS in lieu of the normal 20 to 30 percent down payment. We can help them do it in a way that minimizes the tax consequences and keeps their investment strategy on track. The child would need to have at least 5 percent of their own funds to cover a portion of the down payment and the rest could be pledged. Once the child pays down the 20 to 30 percent pledge, the securities are unencumbered and the child has that equity back in their home,” says Kanavos. Non-retirement securities held at UBS can also collateralize a securities-backed credit line that can be used to close a cash purchase – and negotiate a better price. The buyer can then enter into a mortgage with UBS and use the cash proceeds to pay down the credit line. “From a product perspective, you want to choose the mortgage option that best meets your current and projected financial situation,” Kanavos says.
3. Are you fiscally disciplined?
Setting aside money to carry a home may mean scaling back discretionary purchases, like traveling and entertainment. You may or may not be willing at this stage in your life to ‘do without.’ “Are you willing to methodically allocate a portion of your disposable income to owning a home? If not, you may want to hold off on taking that next step,” Lawlor says.
4. How important is owning a home?
You may be tempted to house-shop because your peers are reaching that milestone. But buying a home means being tied to a piece of property. “I’ve counseled children of clients who say, ‘I just don’t know if I’m ready, mentally and financially, to purchase a home,’” Lawlor says. “It’s better to rent until you solidify your plans.”
5. Are you counting on home appreciation?
You may not be able to get your asking price when you’re ready to put your home on the market, Kanavos warns. “Don’t assume you can flip your house. Inventory can be tricky. Think of your new home as an investment for the future.”
Refinancing your mortgage
Although interest rates are ticking up, they’re still historically low. That’s prompting millennials to enter the market for the first time – and ARM borrowers to lock in a fixed-rate mortgage. The rate may be higher than what they’re paying, and there will be refinancing costs. “A break-even analysis should show you how many months it will take to recoup the total cost of refinancing,” Lawlor says. “If you plan on being in your home for at least another three years, it might make sense to move from one mortgage product to another. But if your break-even point is more than two years out, you may want to hold off on refinancing.” Are you prepared to pursue your financial goals? Together we can find an answer. Connect with your UBS financial adviser.