Be Smart When Buying a Home
By Jeff Cook | May 16th, 2016
A home will probably be the biggest purchase you ever make so you want to be sure you’ve got all your ducks in a row. It’s important to be smart when buying a home. You need to make sure you are able to afford the quoted monthly mortgage payment you are given as well as learn all the factors of the home buying and homeownership process.
A large factor in the mortgage crisis from a few years ago was that banks were lending clients large loans that they may have not been able to repay. Thankfully, requirements have been put into place to better decide how much of a loan a borrower can be approved for. But just because there is a better system in place doesn’t mean you shouldn’t check behind them. Just because your approval says you can afford a $300,000 home doesn’t mean your budget can. Banks look into your take home pay and the total number of payments you make to your debts. This doesn’t include payments made to utilities, entertainment, gas and groceries. Make a spreadsheet of your budget and enter in the monthly mortgage payment numbers your bank is giving you do make sure you aren’t stretching yourself thin.
A second large factor of the crisis were risky mortgage options. Buyers were jumping at the opportunity to sign up with adjustable rate mortgages, also known as ARMs, which offered low interest rates for the first few years of the loan, but shot up to higher rates and monthly payments when the initial period was over. The best option is a fixed-rate mortgage, and while most chose a 30-year plan, if you can budget it, look at a 15-year plan which can save you thousands on interest rates over the life of the mortgage.
Now that the financing is laid out, it’s time to decide on a house. When you’re looking, imagine if you can still be happy in this home in 5 years, or even 10. Is your family planning to grow? Will you need to be paying attention to which school district your future home is located in? If the house is in need of any renovations, or if there is any remodeling you’d like to do so that it flows better for you, do you have the money available to hire a contractor?
Lastly, this transaction is similar to buying a car, which probably almost everyone has done prior to becoming a homeowner. Many people like to skimp on making a down payment, especially if they’re trading in, because there doesn’t seen to be a benefit to it at the time. But then not long after driving that new car off the lot (which just depreciated it a lot) you get into a car accident that decreases the value of your car. Now you’re upside down in it. Buying a home can be the same way. While it is said that a home is an investment, there are still ways to lose money on it. For example, you put down 3% ($7,500) on a $250,000 home. The market unexpectedly drops and now your home is worth $50,000 less. You are now upside down in your home by $42,000 at most. Hopefully you wouldn’t be in a position at that point that your home needs to be sold, but if so you will be taking a large loss. Saving somewhere between 10-20% down on your future home will give a nice cushion for home equity.
Buying a home can be overwhelming, especially if it is your first home or you are stepping back into homeownership after the last market crash. We are here to help you every step of the way, along with our preferred lender.
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Interested in buying a home? Visit: www.JeffCookRealEstate.com
Jeff Cook Real Estate