How to Begin Living in a New Home

Home ownership, a vital element in The American Dream, is a blessing. Unfortunately, it also contains the seeds of financial misfortune, perhaps never more graphically depicted than in a 1986 Tom Hanks movie, The Money Pit, in which a young couple experiences every calamity possible in remodeling a dilapidated house. With the aim of helping aspiring homeowners avoid some common errors, I want to pass on five tips.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Financial ability to purchase a home
• Willingness to make improvements slowly and methodically

1. Pick the right area. Choose an area that exhibits pride of ownership, few if any slum properties, an absence of nearby vacant commercial spaces, neighborhood schools with high performance ratings, and a community with a low crime rate. Though a pretty house is nice, location is the main concern. I’ve always operated on the premise that the worst house in the best neighborhood beats the best house in the worst neighborhood.
2. Avoid a hazardous mortgage. If you finance your home with an adjustable loan, there’s a likelihood that your payments will rise in the future. For this reason, opt for a fixed rate loan. It’s true, of course, that your initial rate will be higher, but if you can handle a 15-year fully amortized loan, you’ll come close to getting the best of both worlds.
3. Don’t stint on the down payment. There is temptation to lever into as expensive a home as you can with the least cash possible. I recommend against this. The specific percentage down payment to aim for is 20 percent. Loans not exceeding 80 percent of a home’s value normally carry lower interest rates, and are exempt from mortgage insurance that adds a premium of about ½ percent per year.
4. Hold title wisely. Married couples traditionally hold title to their homes in joint tenancy so that in the event of a death, the surviving spouse receives automatic title to the property without the inconvenience of probate. Although this solves one problem, there is an inherent disadvantage. Only half the property takes a stepped up basis as of date of death. The other half remains at the original acquisition basis, which can result in the imposition of an eventual capital gains tax. This problem is resolved if title is held, instead, as community property, where the full property takes the stepped up basis. Check this with your counsel.
5. Be slow to remodel. Now that you’re sitting in your very own home, you see all the things you want to change. Certain items of repair may be required at once for simple habitability, but except for these, go slowly. It’s best that you live in a structure for awhile to get a feel of what you really want. A home will grow on you with time, and ideas concocted during your first week of occupancy often seem outlandish by the third month. Spend the first six months in planning, measuring, sketching, collecting prices, inspecting other homes and models, and enthusiastically fantasizing. At the end of that time you may be ready to proceed.

Tips & Warnings

• The perfect arrangement is a home that you thoroughly enjoy and which is considerably less expensive than you can afford.
• If you’re new to an area, postpone a home purchase for awhile. Not until you’re familiar with an area can you select wisely.
• If you expect to move from an area within a couple of years, you’ll probably be better off not buying a home.