House hunting is a lot of fun, a lot of stress, and has a lot of potential reward. Potential is key here because a lot of times people make an emotional decision rather than a mathematical one and it hurts them in the long-term.
“Oh, honey, I know the house is just over our budget but we will make it work.” Or, “I know the neighborhood isn’t great but it will turn around!”
These are just a couple of things people say when they are buying a home. They try to talk themselves into it rather than just letting the numbers and the home convince them. The moment you try to justify the home you’re buying, you’ve already lost and you should look for a different home.
So here we will look at 5 tips I’d suggest to any homebuyer, seasoned, or otherwise.
1. Stay on budget.
This is the most important thing I can tell you. Decide on a budget rationally and don’t exceed it. Also note this: the price of the home is not the only factor when considering your house budget. There are also taxes and insurance to consider as well.
When my wife and I were home shopping we found one home we loved for $1,700 annual property taxes and another for $5,500; that’s a difference of $317 per month. On a house with lower taxes you can afford a little more house; higher taxes lead you a smaller one.
2. Pick a smart mortgage.
“Glen, an adjustable rate mortgage sounds like a good deal.” If I were Glen, I’d be rethinking that whole marriage thing, but seriously an adjustable rate mortgage (ARM) is very risky and hardly ever adjusts down. Your interest rate will continue to go up which means (1) your monthly payment goes up and (2) you’re paying more for the house in the long-term.
You should look at a fixed rate mortgage at either a 15, 20, or 30-year term. The more years the higher the amount in interest you are paying so I would recommend that you choose a 15-year mortgage if you can swing the payments. If you buy a home when you’re 25 and plan on staying there, you’ll have a paid for house when you’re 40 and that’s if you don’t pay any extra over those 15 years. Pretty cool, huh?
3. Location matters.
Goodness gracious did my wife and I almost make a terrible (rookie) mistake. We had house fever and wanted a house like mad. Because of this, it clouded our judgment and we almost closed on a house that was in a really bad neighborhood. We thought that because this house was in a subdivision that wasn’t as bad as the surrounding neighborhood we’d be okay. We were wrong.
If you’re unfamiliar with the area, call the local police department and speak to a seasoned officer. A lot of times they will tell you how the area is and help you make a wise decision. That tactic worked really well for us and we waited for the right home to come up and made a good decision. Patience is a virtue, no doubt.
4. Don’t succumb to pressure.
“Tina, Billy, you’ve been married for a year now, when are you going to pull the trigger on a house?” That’s uncle Ted. He’s broke but has no issue telling people what the “smart” thing to do is when it comes to buying a home. Here’s the deal, if you are (1) planning on moving a lot, (2) in significant debt, or (3) have little to no money in savings, renting is a lot safer and preferable.
Moving into a home with no money is asking for trouble and if you are planning on moving you may become a landlord apart from your choosing. Make a logical decision, not one out of pressure.
5. Put 20% down.
I know this one hurts but there are some really good reasons to put 20% down. Chief of most being that you avoid primary mortgage insurance (PMI). This is insurance you pay on behalf of the mortgage holder in case you default. People who put less than 20% down are more likely to default, so they add this “fee” to your monthly payment. It’s between $75-$100 per $100,000 and falls off after your home equity reaches 20% of market value. Note, at the time of this writing, PMI doesn’t fall off of an FHA loan unless you refinance to a conventional.
Second reason for 20% down is that you’re moving into the house with some equity. Let’s say you bought a $200,000 home with 20% down, now you owe $160,000 and with the market currently rising (2016), plus what you will put into the house will just be gravy (on top of what you’re paying every month). In 10 years you may have a $250,000 home with a balance of $100,000. Sounds fantastic to me!
If you check off all five of these tips when buying a home, you will have a lot better experience and far less stress. Just remember to operate off of math rather than emotion.
Any tips you’d recommend? Let’s hear below in the comments!