Buying a home is likely the largest purchase you will ever make. This is not the time to make mistakes that could easily plunge you into an unfavorable financial situation.
During my 18-year career as a real estate broker, I learned a lot of things, but none was as valuable as what not to do! I didn’t learn this in a seminar or while studying to pass the licensing exam. I witnessed real-life situations where buyers did really dumb things related to buying real estate — buyers who then went on to regret the decisions they’d made.
Avoid these five home-buying mistakes, and you will avoid getting in over your head with a house you cannot afford and save yourself many thousands of dollars and heartaches in the process.
MISTAKE: ALLOWING A LENDER TO DETERMINE HOW MUCH YOU CAN AFFORD.
When you meet with a lender to get preapproved for a mortgage, that lender is going to tell you how much house you can afford and how much money the company is willing to lend to you. Understand that he or she is concerned about only two things: your ability to repay the mortgage and the size of his or her commission.
This lender wants to steer you into the biggest mortgage possible. Ignore that number. It is not based on what you can afford because the lender has no idea what you can afford.
You need to set your own housing budget based on your finances and lifestyle before you ever sit down with a lender or other real estate professional. And that housing budget should be realistic enough that you can afford to make progress on all your other important financial goals like maintaining a healthy emergency fund, getting debt-free and funding retirement accounts.
MISTAKE: BASING YOUR HOUSING BUDGET ON TAX BREAKS.
If you itemize your tax return, the interest you pay on your mortgage may be tax-deductible. That can be a valuable tax break, but it shouldn’t have a bearing on the size of the housing budget you give yourself.
If things are so thin you are depending on a tax break to qualify for a mortgage, you are skating on thin ice. That’s a clear sign you are getting in too deep into a house deal you cannot afford.
MISTAKE: MAKING THE SMALLEST DOWN PAYMENT POSSIBLE.
Your down payment represents your skin in the game. It is the amount of that house you will own on the day you close the deal. Twenty percent down payment is the minimum you should consider. If you cannot come up with that amount, you need to keep saving until you have that amount in cash.
Starting out with 20% equity will go a long way to protect you against the heartbreak of discovering yourself upside-down in a mortgage you cannot afford.
MISTAKE: IGNORING RELATED COSTS.
It is easy for first-time buyers to assume that $1,500 monthly rent is the same as $1,500 monthly mortgage payments. Homeowners have related expenses that renters do not — things like property taxes, property insurance, maintenance and repairs.
Renters don’t worry about replacing the roof, appliances or heating, ventilation and air conditioning. You need to factor in all of these things when setting your home-buying budget.
MISTAKE: ASSUMING A 30-YEAR FIXED-RATE MORTGAGE IS BEST.
You definitely want a mortgage with fixed-rate interest, but you might not want one for 30 years. The lender might try to assure you 30-years fixed is the wisest choice, but don’t be so quick to believe that.
Make sure you consider a 15-year fixed-rate mortgage instead. You’ll avoid paying many thousands in interest and have a much better shot at paying it off in full before retirement if you set this up on a 15-year repayment plan.
If you avoid these mistakes and buy a home you can truly afford, your largest purchase ever will become your best investment as well — one that will come back to bless you in so many ways!
Mary invites questions, comments and tips at EverydayCheapskate.com, “Ask Mary a Question.” This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of Debt-Proof Living, a personal finance member website and the author of the book Debt-Proof Living, Revell 2014. To find out more about Mary visit the Creators Syndicate webpage at www.creators.com.