Buy a house without going broke!
So you’ve set your sights on a house that’s just perfect and you just cannot contain your excitement. There’s just one problem — you’re not sure if you can really afford it. But before you turn to the real estate professionals for advice, you may want to develop some idea about what kind of financing you’re interested in and even what you could qualify for. To be forewarned is to be forearmed.
The real estate industry is full of creative loans and fancy mortgages that can make your eyes blur and your wallet bleed. So reading up on them a little before venturing forward with your home purchase can prevent you from falling prey to the potentially infectious enthusiasm of your mortgage lender.
As this About.com article discusses, the root of risk inherent in many mortgage products is in how these loans have made things too easy; too easy for anyone to qualify for or afford homes that are *much* bigger than one’s budget, allowing people to pretty much dig their own money pit, thereby enabling the fermentation of housing bubbles that subsequently turn into explosive busts. To me, these loans appear designed to get you to somehow stre-e-e-tch your way into home ownership. All I can say is: Buyer Beware.
How To Borrow Money Safely For A New House Purchase
Instead, if you’re thinking of buying a home, keep these tips in mind:
- Surround yourself with trusted and seasoned real estate professionals. The people you decide to work and surround yourself with can make or break your home buying experience. Screen them well and find the right guys or gals to help you out on your search.
- Set a realistic budget and determine the types of homes that fit into your price range. Sometimes, you really need to say NO to your inner voice. Don’t be tempted to “upsize” unless of course, you honestly have the money. The money needs to be in your savings account and not simply promised to you by your boss in the form of next year’s raise. Know your true absolute maximum price limit, as this sticky point is what usually gets folks in over their heads, causing them to resort to creative loans. To start with, use tools and calculators to help you formulate your budget.
- Select a fixed rate mortgage as much as possible. Interest rates are trending lower than they’ve historically been so this would be the conservative option. In 2002, my lender was adamant about trying to get me to sign up for an ARM citing the ridiculously low rates then. I steadfastly refused and stuck to getting a fixed rate mortgage (while of course shrugging off the lender’s disappointment) and I’m just so glad I stuck to my gut.
- Make sure that even if you go for a more aggressive loan, that you are able to manage the payments comfortably regardless of what lies ahead in the future. A big mistake people make about taking on debt is to believe that “the future will take care of itself”. And that “it will all work out”. They very well might, but they also may not, as we are seeing today with the waves of foreclosures that have hit the nation. So if you own a riskier loan, you’ll need to be more vigilant about managing it.
- Keep your eye out for signs that your lender is pushing a mortgage of questionable nature upon you. Here are some warning indicators that your mortgage stinks!
- Be aware of the existence of mortgage fraud and how to protect yourself from it. Keep your guard up with these pointers. It is unfortunate that unscrupulous brokers in the real estate industry pitch their scariest loans to the most vulnerable home buyers.
If you’re going to borrow money at all, doing so for a house is a terrific reason to take out a loan. In fact, my mortgage is the only loan I like having :). Home buying can be a very exciting time but we need to keep our wits around us during such times of high emotion to avoid any possible actions we may regret later on. So watch your step, borrow prudently and enjoy the home buying experience!
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{ 10 comments… read them below or add one }
I would argue that selecting a fixed rate as much as possible is not the best advice for everyone. It is rare now for many people to stay in a house long enough to make that a rule of thumb. It’s better to determine how long you will own it and pick the ARM that corresponds to it if it makes sense.
Good post–common sense and planning really do pay off. I’m planning to go with a simple loan when the day comes. No ARMS or interest-only. 15 years if possible, or 20. Until then, I’ll be a happy renter. 🙂
@Madison,
Yes, those are definitely very good points — if you do plan to move sometime down the road, then an ARM that fits can definitely be a much better deal. The only issue here is whether you actually get to move at that point in time and all your ducks line up in a row to make that happen.
When the time comes and you’re planning to make a move, you may end up considering a myriad of factors as well that could influence that move decision at that specific point in time. For instance, if you’re unloading your house during that particular time period, the decision may hinge on the market being healthy enough…but what if it isn’t?
Anyway, too many things can happen several years down the road, so it’s hard to say… In my case, I’d probably still pick the fixed rate loan for the privilege of not worrying about how the wind blows in 3, 5 or 10 years down the road. I guess you can say I’m willing to pay for that peace of mind. Bottom-line, it’s definitely all about how much “risk” you’re willing to take, how much you’re willing to pay for certain things and what your personal circumstances are.
@Mrs. Micah,
Yes one can never argue with “simple”. With finance, things need not be so complex though we all end up possibly making it unnecessarily so. That’s my mantra – K.I.S.S. 😀
Great Post! An ARM is there to twist and that is all that will happen when you take out an adjustable rate mortgage. I expect that my wife and I will move in the next four years, but we won’t if the market condition do not support that decision. By having a low fixed rate we have the ability to wait until the time is right to sell our home. It just gives you so many more options that an ARM. You may find yourself in a situation where you have to sell with one of these “designer” loans.
Trusted and seasoned real estate professionals run and hide when I tell them my income and ratios.
Amen on plane-jane mortgages. Getting a 15 or 30 year fixed is THE way to go.
@SVB,
Your are right, as we won’t know what the market will be like at the intended time of sale. I am much more of a risk-taker, but I do realize others are more risk averse.
Hi! Your blog is really excellent.
Buying a home is an exciting prospect. Choosing the location, the floor plan and finally sealing the deal. There is an important element that exists in most home sales and that is the mortgage. Another type of mortgage is the adjustable rate mortgage. With this type of mortgage the interest rate applies for a shorter period of time. Once that time has passed, usually a year, the interest rate in effect at that time is applied to the mortgage. 🙂
Many good points to ponder here. An ARM is a good idea if you are not planning on staying in the property for more than say four years and hopefully all teh stars are align in your favor. Or you can get refinancing if things get a little bit high.
But with the recent bail outs and the cash flowing into the banks, the average for the last 3 or weeks of a 30 year fixed rate mortgage is below 6 percent. To me this is very enticing and I can l;ocked that up for five years and don’t have to worry about anything that goes in the mortgage industry as well as the changes and or fluctuations in the market or interest rates.
Thanks
JGVFinance
We have chosen a 30 year fixed. That way we have a low monthly payment, but we always pay more than the expected. Next month, God willing, we will pay it off 26 years early.