Buying a home is one of the biggest financial decisions that most people ever make.
No wonder there are many misunderstandings. A few common ones:
- Renting means throwing away money because you don’t own a house!
- Houses are a good investment because they build up equity.
- You need buying (and getting married and having children) a home after you graduate from college.
Fortunately, it’s all nonsense.
In reality, renting is perhaps better than owning it. It really depends on where you live great calculator from NYT to see what that means for you).
Real estate is not a big investment either. In fact, Yale economist and Nobel laureate Robert Shiller reported that the yield on residential property was roughly the same from 1890 to 1990 Zero after inflation,
Most importantly, buying a house is very important personally Decision. That said, no one can and should tell you whether to buy or not.
Renting and owning are two very different lifestyles. Knowing exactly what is in both areas is the key to making the right decision She.
For this reason, we want to deal with exactly what belongs to buying a house – and how to buy one if you want.
Before buying a house: know the real cost
It is easy to believe that you are throwing away money when renting. After all, your rental check goes to the landlord who indeed owns the property.
However, this often could not be further from the truth.
Why? Simple: phantom costs.
These are the invisible costs that many people don’t consider when buying a home. After all, owning a home is much more than just a mortgage.
Some examples of phantom costs:
- Homeowners Association (HOA) Fees
- property taxes
- Repairs at home
- maintenance costs
Ultimately, these costs add hundreds of dollars a month to your cost of living beyond mortgage payments.
Check out this infographic below to see what this can look like over a 30-year mortgage.
But that doesn’t mean you buy always a bad decision. In fact, you may be in a place in your life where this only makes more sense (for example: you have children and need more space, you have to move to a specific place at work, etc.).
If this is the case for you, it is important to know exactly how much house you can afford before you start looking for a house. This brings us to …
Know how much house you can afford
If you want to buy a house, knowing how much house you can afford is the first step.
If you know how much you can spend, you will get the right loan AND can repay it too.
The practical 28/36 rule also makes it easy to find the right amount.
This is a great napkin system that even mortgage lenders can use to determine whether you can afford a home or not.
And it’s very simple:
- Your maximum household cost should not exceed 28% of your gross monthly income. Including everything within your main payment.
- Your total household debt should not exceed 36% of your gross monthly income. This is also known as the ratio of your debt to income.
For example, if you earn gross income of $ 3,000 a month, the best mortgage you can get is probably a maximum of $ 840 a month – that’s 28% of your gross income.
If your debt is at or above $ 1,080 / month, you should probably focus on paying off your debt rather than buying a house.
If you want to (and should) learn more about this topic, be sure to read our article on how much house you can afford.
Know what your credit score is
If you plan to take out a mortgage to buy a house, it is imperative that you check your creditworthiness.
Not only that, but you also need to make sure that your credit score is good in order to get a good loan.
Otherwise, tens of thousands of dollars can be lost over the course of your mortgage.
This is not an exaggeration either. Imagine two people: one with an excellent credit rating of 790 and the other with a low credit rating of 630. Both are aiming for a $ 200,000 30-year fixed rate mortgage.
How much do you think you will pay with interest? Look here:
Source: MyFico.com, calculated in December 2019
The one with a bad credit score ends up paying $ 66,000 More than the one with a good credit score! Provided they can get a mortgage with such a score at all.
If your credit rating isn’t the best, you want to improve it. Below are some IWT resources that will help you do this.
Mortgage rates in 2020
Good news: mortgage rates have tended to fall in recent years – and are expected to remain low until 2020.
As of January 2020, rates have been below 4% since 2019 (Freddie Mac). This is an incredibly low mortgage rate and a blessing for all homebuyers starting this year.
Conclusion: There is no better time to buy because interest rates are so low right now.
Cash on hand: down payments and hidden costs
The usual wisdom is that you need a 20% deposit to get a mortgage. Although this is a great savings goal, you probably don’t need that much to get a loan.
For example, first-time buyers can get an FHA loan that only requires a 3.5% down payment. Even most conventional down payments can be as high as 5% (Consumer Protection Office).
BUT it is important how much your down payment is in the long run. Why? The more you pay for your deposit, the less interest you pay over time.
Imagine buying a house that costs $ 200,000. A 20% deposit leaves you with $ 160,000 to pay out. With a 5% deposit, you still have $ 190,000 available.
Which do you think will be of greater interest? The one with the 5% down payment of course.
The more you pay for your deposit, the lower your interest rate may be. Mortgage banks like it when you have paid as much of your home as you can before you even make a mortgage payment. This shows that you are more likely to pay your bills every month.
Conclusion: You don’t need a 20% down payment to get a mortgage – but it is certainly helpful if you are trying to save money.
Working with a real estate agent
A good real estate agent is someone who works with you and represents your interests. A bad guy usually only takes care of himself and doesn’t care about finding a house that suits you.
That is why it is so important that you take the time to find a good real estate agent that you trust.
There are two types of real estate agencies:
- Seller’s agency. These agencies represent the person who sells the actual house. They are there to protect the interests of the seller. You are not looking for a sales representative.
- Buyer’s agency. These agencies represent you and want to protect your interests. You want to find a buyer.
To find a buyer agency, contact your responsible brokerage agency. This will help you find someone who offers you a good house.
Due Diligence – A checklist of things to look for and things to consider
There are a million different things to look out for when buying a house. Here are just a few very important points to keep in mind:
- Hire a property inspector: This is a third-party specialist who will examine your home for structural defects, damage, and repair suggestions. They give you a full report of their results and can use it in negotiations. Or if they find something really bad, it’s much easier to get out of business.
- Get a home evaluation: Once approved for a loan, you have the option to ask your lender for a home valuation. In this way, the lender can take into account various factors that may affect the price of the house (how many rooms, swimming pools, the price of nearby houses, etc.). This assessment gives you an idea of how high a good price would be.
- Shopping spree: Many home buyers (especially first-time buyers) tend to fall in love with a location and make a purchase. Instead, slower. Be sure to shop around when it comes to your home. And also differentiate the way you find your home. Check newspaper ads, websites like Zillow, and ask your broker for locations.
- Look beyond the price tag: Remember that when negotiating a home, you can always negotiate beyond the price of the home. Maybe you can ask the seller to include a washer and dryer? Or can you ask them to clean the carpets or paint the walls in a different color? Get creative!
Take your time
Buying a house is a BIG financial decision. That is why it is so important that you inform yourself about the process and all the ways you can save money in the long term. Check out some of our other articles on buying a home to find other systems to help you:
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