Buying A Home
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Before we discuss the specifics of buying a home we need to discuss renting. Generally renting is not a good decision since the money that we pay in rent is considered lost money in contrast to money spent buying a home. Even though we will never see any return from money that we pay in rent there are times when renting is wise. You have probably all heard the “you might be a redneck if jokes”. The following are “you may be wise to rent if” situations.
Your job situation is not secure.
You are not sure how long you will live in an area.
You do not have enough for a down payment.
You have other unsecured debts.
Another time it is wise to rent is if you decide to save and pay for a home in full. Since rent can be less than a mortgage, and you do not have to pay for maintenance and property taxes, you can save money while renting. Shop carefully for a rental property and you can find one that will allow you to save enough to purchase a home, but you have to be real motivated to do this. The reward is great once you do this. Just imagine living without rent or mortgage payments.
Buying a Home
The best way to buy a home is to pay for it in full without getting any financing at all. As previously mentioned this takes a real motivated person, as well as someone who doesn’t feel they need to live on Park Avenue. The upside is that much more of your income can go towards investing and other enjoyable things in life.
Interest is a killer when it is working against you. If you have a $100,000 mortgage for 30 years at 5.75% the total interest paid over the loan is $110,086.23. In 30 years you will pay more in interest than the purchase price of the home. You need to do whatever it takes to minimize this.
The second best option for buying a home is to save up as much money for a down payment as you can. The minimum amount is 20%. Lending institutions will generally require mortgage insurance with less than 20% down or possibly a higher interest rate. You do not need the added payment of mortgage insurance. Make sure you have at least 20% to put down.
The more you put down the better off you will be. You can see from the numbers above how interest can eat you up.
How long should the loan term be? The short answer is, as short as possible. Longer term loans will cost you more in interest. If you get a 30 year loan your newborn child will probably have a newborn child before your loan is paid off.
Payment Amount
If you are following the plan laid out on this site, it should be easy to determine how much you can afford. You need to look at your monthly spending plan and decide how much you have available for a house payment. One precaution, do not count on future pay raises or windfalls to determine how much you can afford.
Also, do not forget the added expenses of homeowner’s insurance, maintenance, utilities and taxes that will come along with your new dream home.
A bad decision on a home purchase can have harmful effects for decades. If you can’t squeeze a mortgage payment into your budget without overloading yourself with debt or taking money away from other vital areas, you are not financially ready to buy a house yet.
Paying Your House Off
The best way to reduce the amount of interest paid and pay your house off early is to make extra payments towards the principle.
Using the above $100,000 home mortgage shown above, if you pay one extra payment each year towards the principle you would save $21,642.63 in interest paid and pay off the loan in 25 years.
Make sure that when paying extra, to pay off the principle, that you note that on your check. If you do not make sure that they know that the payment is principle only they may just consider it an early payment.
Remember to follow the plan. Do not try to pay extra on your house payment if you have other unsecured loans, do not have a fully funded emergency fund or if you are not funding your retirement account.
Refinancing
Refinancing is generally a mathematical decision. You just have to know if you are going to stay in your house long enough to realize the cost savings. For example: If it costs you $1,000 to refinance to save $20 per month on your payment than you need to stay in the house for 50 months before you will see any real savings. If you plan to stay there long enough to see the savings then go for it.
Home Equity Loans
The only time a home equity loan could be considered good is when it is used to improve your house. This can still be dangerous. If something should happen, you have now jeopardized the ownership of your house to do the project. The best way to make improvements to your house is to save for them ahead of time. Do not add a home equity loan on top of a large mortgage loan that is not anywhere close to being paid off.
One good use for a home equity loan is when you do not have a considerable amount left on your mortgage, and you can get a lower rate with the home equity loan. Home equity loans usually have much lower costs than regular mortgage loans, thus you will realize the savings from the lower rate sooner.
In years gone by people considered a paid off mortgage as an important accomplishment, but nowadays it seems that even when people do pay off their mortgage they use that equity to purchase a larger house and go into debt all over again. Let’s not ride that bandwagon, let’s get out and stay out from under the burden of debt while living in a paid for house.
Leave the Home Buying Page and visit the Insurance Page.
