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Are You Ready to Buy a New Home?

Updated: Feb 23, 2020

Buying a new home is a really exciting, yet stressful process. People who haven’t been down that path before have no idea what to expect. At least, I know I didn’t. These are some of the most important things I wish I had known before I decided to buy a home.

The Excitement of Purchasing a New Home

It’s really easy to get caught up in the excitement of buying a new home. For some, it’s almost like the high of a drug-induced experience. Don’t get me wrong, there are lots of benefits to owning your own home, and I’m happy that I do. Paying rent seemed like a waste of money to me because I had nothing to show for it over the long haul. Sure, I had a place to live, but I didn’t build any equity in anything.

One thing people forget about is the twenty percent down. Some banks are happy to extend the entire amount of the loan, but don’t forget, that has to be paid back eventually. If this is the case with you, know that the bank will see you as a risk, as a person who isn’t serious about buying a home or their finances. You may be the most hardworking person around, but they see you as someone who might bail before you pay off your mortgage, and if you do, they’ll be stuck with the unpaid portion of your loan.

Another thing you don’t know or won’t know until it happens is that the bank might give you the loan, but they will also require you to pay for mortgage insurance, or PMI. That will cost you approximately one to two percent of your total mortgage balance every year. That will be on top of your mortgage payment. So if you’re pushing the top of your budget, you might want to consider a less expensive home, or maybe save more money before you purchase.

Also, your mortgage insurance will last until the remaining portion of your loan is less than 80 percent of the value of your home. Some banks won’t let you change the interest rate until they are certain the value is less than 80 percent of your home’s value. To the bank, it’s insurance for them against you—because in their minds, you may not follow through with paying for your mortgage. And before you get angry about that because you’re totally committed, consider that you borrowed a lot of money without bringing in your 20 percent in the beginning. Given that small detail, they aren’t entirely wrong to think that way.

The reality is that you’ll basically be paying an additional payment each month. That adds up to about one percent of the value of your home over a year’s time. To put it in plain terms, if you buy a $150,000 home, your mortgage insurance will cost you $1,500 a year until you get it paid off.

Be Patient and You'll Make Less Mistakes

You can avoid all of that if you’ll be patient and save up for that down payment. Be smarter with your money, eat out less, spend less on clothes,shoes, fun, and unnecessary items. Spending less will be good practice because once you own your home, there will always be “extras” that require additional money besides the payment.

Choosing the location of your home is extremely important. That will be where you live, entertain, commute from and spend most of your time. If you’re planning on it being your forever home, consider how the neighborhood might change over time and if it’s really where you'll want to be or whether it's worth your investment.

Shop around for your mortgage and get pre-approved. Meet with lots of banks, (at least 3-5), and ask questions, discuss your options and see what they’re willing to offer you. Make sure the amount you get approved for and the cost of your home is in your budget. The last thing you want after the excitement of buying a new home is to be let down and bummed about not having extra money because of it.

If your home isn't brand new, you'll immediately see things you want to change or renovations you'd love to do. You’ll want the coolest light fixtures, newest technology, fancy faucets, flooring, etc. inside your new home. Your mind will go crazy planning and designing and thinking of how wonderful it all will look, but keep that at a minimum. It’s easy to be blown away with fancy things, but those things come with an expensive price. If your budget doesn’t allow it, don’t get trapped into that “we have to have that” mindset. Those fancy items can wait or can be added down the road.

The most important thing to remember about your new home is that it should fit your needs. You’re not in competition with anyone else, and the last thing you want is for your home to feel like a financial burden. It should reflect your needs as a person and a family. Do you need a formal dining room? Do you even like to cook or entertain? If not, maybe the space could be used in a better way. You need a home to live in, to enjoy, relax and be yourself.

Your Mortgage

Stick with a 15-year mortgage, rather than financing your home for 30 years, if it's at all possible. You will end up paying roughly a third of the interest if you finance it for less time. A 15-year mortgage also comes with a lower interest rate, so keep that in mind. You may pay less per month on a 30-year mortgage, but you’re going to pay a lot more back to the bank.

Don’t buy more house than you can afford. You may be able to refinance later to a 15-year mortgage, you will lose quite a bit of money on interest and closing costs by doing that. No matter what you think you can do, don’t go above 40 percent of your take-home pay as a debt. That’s a good thing to remember if you want peace of mind in your future. If you’re working tons of overtime or living from paycheck to paycheck, you’ll never have time to enjoy your home.

Save a little money for moving expenses. If you pitch every penny into your down payment and/or closing costs, you’re going to find yourself in a pinch. You’re going to need something set aside when you first move into your new home. If your house has a yard, you’re going to need a lawnmower if you don't already have one, or you’ll have to hire a yard service to do it for you. You’ll probably want new furniture for at least some of your rooms, and you’ll need appliances unless they come with your home. You’ll be surprised by how quickly it all adds up.

Stick to the Basics

Start with the basics and upgrade as you can. Down the road your tastes will change, so don’t invest all your money in new furnishings in the beginning. You’ll want everything to come together at once, but resist the temptation until you’re financially stable enough to buy what you want.

Buying a home for the first time is scary. You’ll make some mistakes in spite of all your planning, but rest assured, you'll be fine. You’ll wish you had done some things differently, and you’ll wish you had saved more money. The important thing to remember is that you're not just buying a home, you're building a life. You and your family will be busy making memories that will last forever.

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