HOME BUYING 101
We are talking about common sense money advice around all things home buying. So you’re buying a home – what is the best way to buy a home that ends up being a blessing to your financial future? How can you buy your home wisely and get the best price? How can you make sure you are ready to purchase a house? Ok – here we go!
DO THE PREP WORK
You will hear me say this time and time again – it’s important that you do the prep work before you make any big financial decisions. The prep for being ready to buy a house and have that house be a blessing instead of a curse, the way to avoid being house poor is to pay off all of your debt, save your OMG fund for emergencies (a total of 3-6months of expenses), and then save a minimum of 20% down.
Honestly, the ideal amount for a downpayment is 100%. Yep, you heard that right. 100% down – that means paying cash for a home. That’s the best and least financially strapping way to purchase a home… but it also is the one that takes the longest, has the longest runway and requires dedication and patience on the front end.
The larger your down payment is, the less your monthly payment and the less you are paying each month in interest. When you add this up over the course of years and years, this can make a huge difference – more payment to principal and less to interest.
The best way to pay off your home early is to have the smallest possible balance on your mortgage and focus on paying it down ASAP.
Yes – it sounds like common sense, but when you get to house shopping it’s so easy to slip down the slope to a bigger mortgage… and with mortgages bigger is absolutely NOT better.
You have to change your mortgage mindset to; what’s the smallest mortgage possible for a house that meets our needs (even if it doesn’t necessarily check each and every want on your list).
People say “forever home” as though they know what the future holds but the truth is – we don’t. We don’t know that we will stay in a home forever, and the thing about houses is that there is one on just about every corner. Give yourself grace in this process and don’t attach the weight of that “forever” word to your house purchase. It’s too much pressure – it will make you stop thinking and shoot from the hip.
WHAT YOU NEED TO KNOW ABOUT MORTGAGES
Mortgages – here’s the skinny – mortgage brokers are in the business of selling debt. Their job is to make the bank money – that bank wants to get you approved for the biggest mortgage possible so that you owe more and pay more in interest… or they can sell your mortgage to the highest bidder which comes from having the biggest balance. The broker’s prerogative is to sell you the biggest and meanest mortgage out there. Whatever the bank approves you for, you do NOT want to or need to borrow all of that money – that’s the maximum!
How much should you borrow?
I recommend borrowing as little money as possible! A good rule of thumb is that you want your mortgage payment to be no more than 20-30% of your take home pay or your net income on a fixed rate 15-year mortgage. Figure out what the mortgage balance that creates a mortgage payment that you can handle – add the amount of money you have saved for a downpayment and subtract the closing costs, inspections and other “gotchas” that come with homeownership and you have your budget for a house. That is the absolute most that you should be spending on a home.
Once you have that number… that’s your budget for a home purchase. Don’t even look at homes that are well outside the budget! I repeat – don’t look at homes that are way outside of your budget. It’s tempting, yep, and it might make you buy something that you truly cannot afford.
Why choose a 15-year mortgage?
Why a 15-year mortgage instead of a 20-year or even a 30-year mortgage? I’m glad you asked! The goal with any home purchase and your mortgage is to pay it off ASAP. Yep, I said as soon as possible. So already we are leaning towards a 15-year mortgage as being the best choice, because, even if you don’t pay extra on your mortgage, which you should… you are going to automatically pay off a 15-year mortgage 15-years sooner than a 30-year mortgage.
Let’s dive deeper into those numbers. Let’s say you borrow $200,000 at 3% interest and let’s compare 15-year vs. 30-year mortgage for these numbers. For the 15-year mortgage the monthly payment would be about $1,400 a month. For the 30-year mortgage the payment is just under $900 a month. Ooooo… it’s $500/month cheaper for that 30-year… sounds tempting, right? But remember.. The goal is to pay off the mortgage ASAP.
So what does that $500/month savings on the 30-year mortgage cost you? It costs you $58,000 in interest! It costs you 15-years of being in debt and writing those checks! And… get this… if you pay off your 15-year mortgage in 15 years and just keep investing that $1,400/month in a mutual fund earning 12% a year for 15 years… that mortgage payment alone would turn into $700,000! Wait… did I just tell you that a 30-year mortgage vs. a 15 at the same interest rate is going to cost you $58,000 in extra interest, 15-years of your life continuing to be in debt and the opportunity to earn nearly ¾ of a million dollars in the stock market! Yep, I sure did! That is why a 15-year fixed rate mortgage is absolutely the way to go!
What is a fixed-rate mortgage?
Put simply, it’s a mortgage interest rate that isn’t going to adjust. A rate that is fixed – a rate that stays the same for the entire life of the loan, regardless of who the lender is or if the mortgage is sold by your bank.
This means that there’s no balloon payment, no adjustable rate (or ARM) mortgages, no balloons or large payments due at the end. Fixed-rate means that the interest percentage charged on the principle is the same each and every month that you have the mortgage.
Fixed rate saves you from balloons – where a bunch of the loan is due in full at the same time – and buffers you from changes in the market that can cause your adjustable rate mortgage to creep up. I’ll give you a hint – mortgage companies (Again – in the business of making money on the interest from your mortgage) don’t adjust rates down… so where do you think that rate is going to adjust to? Yep. UP!
By choosing a fixed rate mortgage you are locking in your rate for the life of the mortgage. If, a couple of years from now the economy has changed and interest rates have adjusted down – you can always consider refinancing then. But… you could also accelerate your payoff and aim to get that mortgage in your rearview mirror ASAP! In this instance the ball is in your court – you are in control of whether or not you want a new interest rate and you are able to choose yay or nay – not the mortgage company!
When you are creating your budget for your home purchase, don’t forget about closing costs. You know when you buy a ticket on ticketmaster – back when the world was open and attending concerts was a thing we were doing – and there is a transaction fee? Closing costs are the ticketmaster transaction fee of home buying.
These usually run from 2-5% of the purchase price of your home. Closing costs can include an array of things from title processing, title insurance, application fees, lawyer fees, the cost to run a credit report and things like home inspection.
Just one more thing to keep in mind as you are calculating your home purchasing budget. Some mortgage companies allow you to roll this amount into your mortgage balance, but paying it out of pocket can help to keep that mortgage balance down and remember… the lower the mortgage balance the better.
YOU NEED A REALTOR
When buying a home I always recommend that you utilize the services of a reputable and trustworthy Realtor. A realtor is like the quarterback of your home buying team – they are the one who runs point, has the playbook, and they are seasoned. They’ve been through this process before and can offer you an outsiders view – all with your best interest in mind.
Yes, they make a commission when you purchase a home and Yes, they absolutely should and Yes, it’s still worth it to use the services of a realtor. Realtors save you money in many ways… here are just a few:
1) They are master negotiators – years of experience negotiating means less cost for you – whether it’s the cost of the home or the closing costs, inspections or other “gotcha’s” in the home buying process, on average people spend less when they use the services of a trusted realtor.
2) They have their finger on the pulse of the market – and they know what the home you are looking to buy should go for. They can share their thoughts with you and tell you what it’s worth – yes, better than Zillow or any other free website you might find – because they are a human being who lives and breathes the market in your area. If they are helping buyers and sellers in your area with lots of home purchases they know the feel of the market and they can honestly share what a reasonable bid is and what a great and not-so-great deal on that property look like & can help use this as a bargaining chip.
3) They have the inside scoop to great deals – maybe there is a home about to come on the market and being listed by another realtor in their office, or someone they know, or being sold by a competitor but they know about it before the listing is live. They are in the business of knowing what homes are being sold – yes, you’re doing tons of research, but it’s your hobby – it’s their full time job. They have a team that is looking at these listings on the regular and they’ll know sometimes before it’s able to be seen on the MLS that something is coming up for sale.
The bottom line is that realtors can save you time in your home search and they can save you money on your bottom line. I recommend asking your friends or family in your area who they trust, know, or have used in the past. There’s nothing like a ringing endorsement from a known entity to put you at ease with your realtor selection.
CLARIFY YOUR WANTS & NEEDS
Think about clearly defining wants vs. needs in your quest for a house. Needs are things that you and your partner feel that you have to have in your future home. These are things like the number of bedrooms, bathrooms, specific features in neighborhood or locations, school districts, etc. No one can tell you what is on your need or non-negotiable list. It should align with your current values and your plans for growing your family, as best you can tell at this point in your life.
Wants are things that, although you’d love love love for your future home to have them – they are negotiable at the time being. These are things that you could possibly add or change to your home in the future or things that you’d like in your next home, but wouldn’t be a deal-breaker if you can’t check each one of these boxes this time.
The Needs are the cake – the Wants are the icing – it’d be great…. But the cake is really what you are looking for.
Keep this list – yes, a physical list that you write things down and agree with your partner on – handy. Keep in mind that this may change… you may find that some of your wants are needs and some of your needs aren’t as important once you start looking at home. Don’t cement the lists, but let them grow as your vision changes throughout your house search.
Be mindful of what wants that you can change – you could add an addition on to the house, add a hot tub or a pool – but you can’t change the neighborhood or the lot size – so just keep that in mind what things you could change later down the road once you’ve saved the money vs. what things you cannot change.
TRUST YOUR GUT
Trust your intuition during this process. It can be stressful, you can be asked to make decisions on your own or as a couple with a specific deadline. It’s a big deal. Usually, relative to your life it’s a big purchase. It can be very emotionally charged – you imagine your life occuring at the home, you place an offer – they choose someone else. It can be a long road, a roller coaster and it can be really hard.
My best advice relative to your home buying experience is to be calm, not feel rushed, to not make big decisions under the gun, to sleep on it…. And most importantly to be on the same page with your partner… and to trust your gut. If it seems too good to be true, make sure you investigate. We don’t make good decisions when we are stressed or feeling cornered.
When you feel yourself saying there’s only two options, painting yourself into the metaphorical corner or convincing yourself that this house is the one that you absolutely positively have to have… that’s when you can get in trouble. Try to be patient. Try to be calm. Try to be logical.
Truly trust your intuition and if it doesn’t feel right, just walk away.
Buying a home is a big deal, a large investment, and something you’re going to live with and in for the foreseeable future. Take your time. Make sure you do the prep work and get your financial foundation sturdy – pay off those debts, save your OMG fund and a beefy downpayment. Remember you’re looking for a 15-year fixed rate mortgage with a payment that’s no more than 20-30% of your take home pay and the goal is a mortgage with the smallest possible balance. You are on a quest to pay off that mortgage ASAP so the smaller, the better!
On your team you need a trusted realtor, a partner with a clear vision, an understanding of what you NEED from a house and what you WANT from a house, and the ability to trust your gut. You are the only one who can create that list in accordance with your values.