Monday, September 30, 2019 / by Nick Arndorfer
Purchasing a home is most likely the largest financial investment most of us will make in our lifetime, so it's essential to be wise during the process. Consider these 10 strategies to set yourself up for a successful home-buying process... and a smart long-term investment.
1. Buy for the long haul
A home is a BIG investment. Buy a home you'll want to live in for at least five years; a home equipped (or soon to be equipped) with the features and space you need, both now and in the future.
2. Buy to improve your life, not speculate with money
Your home is more than a financial investment; it’s where you eat, sleep, host friends, raise your kids... it’s where your life happens!
The housing market is too unpredictable to buy a primary home purely because you think it will net a large short-term financial return. You'll most likely be living in this home for several years, regardless of how it appreciates, so your first priority should be finding a home that will meet your needs and help you build the life you want.
3. Focus on what’s important to you
Focus on finding a home you can afford that meets your needs, but don’t get distracted by shiny features that might break your budget. Nice-to-have features often drive up the price tag for things you don’t particularly value once the initial enjoyment wears off.
Make a list of your basic needs, both for your desired home and for your desired neighborhood. Stick to finding a home that meets these needs, without buying extra stuff that adds up.
4. Set a budget and stick to it
It’s important to set a budget early, ideally before you even start looking at homes. In today’s market, it’s incredibly easy to go over budget. The most common culprit? Location.
There’s nothing wrong with that. Local schools matter and a short commute improves your life. But be realistic about your local market and about yourself. Know what you’re willing to compromise on — be it less square footage, home repairs or a different neighborhood.
5. Aim for a 20% down payment
If you can afford it, a 20% down payment is ideal for three reasons:
1. Buyers who don't put a full 20% down pay a premium, most commonly in the form of private mortgage insurance (PMI)
2. Buyers who put more money down upfront typically make fewer offers and buy faster than those who put less money down
3. A higher down payment reduces your financial risk. You don't want to owe more money than your house is worth if local markets dip when you need to sell.
6. Keep a six-month strategic reserve
While a down payment is a significant expense, it’s also important to build up a strategic reserve and keep it separate from your normal bank account. This reserve should cover six months of living expenses in case you get sick, face an unexpected expense, or lose your job. A strategic reserve saves you from financial hardship in an emergency and provides peace of mind.
7. Get pre-approved and stick with a fixed-rate mortgage
The pre-approval process requires organizing all your paperwork; documenting your income, debt and credit; and understanding all the loan options available to you. It’s a bit of a pain, but it saves time later. Getting pre-approved also shows sellers you’re a reliable buyer with a strong financial footing. Most importantly, it helps you understand what you can afford.
Lock in your mortgage rate. A 30-year fixed mortgage has a specific fixed rate of interest that doesn’t change for 30 years. A 15-year fixed mortgage does the same. These typically have lower rates but higher monthly payments, since you must pay it off in half the time. Conventional fixed-rate mortgages help you manage your household budgeting because you know precisely how much you’ll be paying every month for many years. They’re simple to understand and they don’t tempt you with a low initial payment to buy more house than you can afford.
8. Comparison shop to get the best mortgage
Though a home is the biggest purchase many of us will ever make, most home buyers don't shop around for a mortgage. While it might save you some annoying calls and hassle, it could also cost you $40 or $50 every month, for years. The difference of half a percentage point in your mortgage rate can add up to thousands of dollars over the lifetime of the loan. It’s important to evaluate all the available options to make sure you’re going with the lender who meets your needs — not just the first one you contact.
The three most important factors are:
1. The lender offers a loan program that caters to your specific needs
2. The lender has the most competitive rates
3. The lender has a history of closing on time
We highly recommend starting with Chris Reickard of Academy Mortgage!
9. Spend no more than a third of your after-tax income
It’s better to regret spending too little on your home than spending too much. One-third of your after-tax income is a manageable amount.
10. Be willing to walk away
Buying a home is a time-consuming, stressful, but ultimately rewarding endeavor — if you end up closing on a home that meets your needs. But it’s important to manage your expectations in case you don’t immediately find a home you can afford with the features you need. Always be prepared to walk away if the sellers don’t accept your offer, the home doesn’t pass inspection, or the timing isn’t right. Hold fast to your list of must-haves, stick to what you can afford, and don’t overreach or settle.
Think with the end in mind! It’s not a tragedy to miss out on any particular house. Remember you’re playing the long game. You want to be happy with your decision 10 years from now.