May 21, 2015
When it comes to big-ticket purchases, it gets no bigger than buying a home. That makes it seriously important to avoid costly mistakes. Here are four expensive home-buying mistakes I want you to steer clear of. Follow my advice and you could save tens of thousands of dollars and ensure you will never be house poor:
Home Buying Mistakes
1.Relying on a Lender to Set Your Housing Budget. When you ask a lender for a mortgage pre-qualification and pre-approval, part of the lender’s job is to tell you how big a mortgage the lender will be willing to offer you. Ignore it! Your lender only cares about your ability to repay the mortgage. He or she doesn’t know anything else about your life. No lender is going to ask if you are on track with your retirement savings, or if you plan to send kids to college, or if you have family members you anticipate needing to help financially at some point. You need to set your own housing budget. And that housing budget should be low enough so that you can afford to make progress on all your other important financial goals.
2. Basing Your Housing Budget on Your After-Tax Cost. If you file an itemized federal tax return, the interest you pay on your mortgage is tax deductible. That can be a valuable tax break. But it should not impact how big a housing budget you give yourself. That practice is a sure sign you are stretching into too expensive a deal. Make sure your home is affordable even without factoring in the mortgage interest deduction.
3. Making a Bid That Waives the Home Inspection Contingency. In some markets where demand is high and the inventory of home sales is low, some prospective buyers make offers that waive the home inspection to make themselves more appealing to sellers. That’s insane; if there are major structural or mechanical issues you could be in for tens of thousands of dollars in added expenses. A smarter move is before you bid shell out the money for the home inspection. If your bid isn’t accepted you’re “out” the cost of the inspection. But that’s smarter than winning a bid with no inspection and then being hit with a slew of problems later on.
4. Assuming a 30-year Fixed Rate Mortgage is the Best Loan Deal. Don’t get me wrong, I think a fixed rate mortgage is the way to go for the vast majority of home buyers. But my preference is to challenge yourself to see if you can afford a 15-year fixed rate mortgage, rather than a 30-year. Yes, the monthly payments are obviously higher on a 15-year loan, given that you are repaying the loan in half the time. But keep in mind that 15-year loans typically have a lower interest rate than the 30-year. And the real payoff is that you will owe thousands of dollars less in interest charges over the life of 15-year loan than you will with a 30-year. That’s a big financial advantage.
I highly recommend anyone in their late 40s or early 50s who is taking out a mortgage, set their sights on a home they can afford with a 15-year mortgage. That assures you will have the mortgage paid off before you retire, which is a key to lasting financial security.