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The Economics of Purchasing a Home

It has often been stated that a home purchase is the largest and most important financial decision you will make in your lifetime. So now that you are faced with what could be your most monumental financial decision, what factors should you consider to make it a prudent one.

The first parameter which will frame your decision is affordability. Affordability is determined by savings available to invest in the purchase and cash flow resources to cover expected expenses such as mortgage debt service, utilities, taxes and insurance. When considering both available reserves and cash flow it is, of course, essential that you budget for all of those unexpected expenses that are inherent with home ownership. At the outset it is a must to seek the counsel of a bank or mortgage broker to complete this analysis. This will also allow you to be armed with a mortgage pre-approval letter which is a prerequisite in the real estate purchase process.

Once you’ve determined how much house you can afford and zeroed in on the house of your dreams, further economic considerations should be made. One of the first items to thoroughly evaluate are the property tax bills. Your evaluation should not end with simply looking at the amount of the bills. It is also important to look at the assessed value of the property; in relation to the purchase price, neighboring properties, improvements envisioned for the property and existing exemptions. All of these factors could impact future tax bills and will also affect future salability of the property. There may be certain existing tax exemptions on the property which you will not be entitled to. Removal of these exemptions could substantially increase the amount of the tax bill. Also, the purchase of the property for an amount substantially more than the assessed value could trigger a large increase in the taxes. Comparison of the assessed value of the property to neighboring properties is also a gauge to whether the property is accurately priced. An assessment which is vastly out of line with neighboring properties could also impact the future salability of the property. It is often detrimental to own the highest valued property in the neighborhood.

Lastly, you must view a property’s eccentricities and unique qualities as an investor, not a homeowner. Those unique qualities which may appeal to you may not have broad market appeal. Your preference in small rooms and pink and lime décor will probably not benefit you economically when you seek to resell the property. Other factors such as the property’s location, convenience, school district and neighboring properties should be viewed through the same prism. The age and condition of the home are also important economic considerations. They impact you immediately based on the need for repairs or upgrades and they may have a long term impact if major renovations or replacements are needed to preserve your investment. To assess these matters a home inspection by a qualified professional is a must.

Purchasing a home is both an emotional and financial decision. To a large extent you and your family are equipped to deal with the emotional aspects of the purchase. To insure a wise financial decision, it is essential to retain the services of an experienced mortgage broker, realtor and real estate attorney to advise and guide you through the process.