Buying a home is exciting and a great long-term investment. Realtors will sell you on the fact that owning is better than renting. While this may be the case, here are 4 ways new homebuyers waste their money. Make yourself aware of these to prevent losing tons of cash over the course of your loan.
4 Ways New Homebuyers Waste Their Money
1. No Down Payment
Sure there are loan options available that don’t require a down payment. Why should you put any money down that you don’t need to? After all, you need to buy new furniture, paint the bedroom and invest in that amazing barbecue.
When you don’t put money down, a couple things happen. First, the entire loan balance is accruing interest, daily! Take a look at an amortization schedule. Almost all of your monthly payment goes to interest for somewhere near one-third of the loan life. Most people never realize they pay more in interest over the course of the loan as they do in the principal – yeah the cost of the home.
So if you’re cool with spending $300,000 on a home and paying an additional $300,000 in interest — go ahead and finance every last bit of the purchase price.
The other problem is that loans without 20 percent equity automatically have to pay Premium Mortgage Insurance. PMI is an expensive insurance, approximately another 1 percent of your monthly payment, which protects the lender against you defaulting on the loan. Depending upon the type of loan you have it may or may not be possible to remove that even when you have a 20% equity in your home so you are paying that PMI for the life of your loan, adding up to a lot of dollars.
2. Too Much House – Too Much Mortgage
We all have our ideal notion of what our dream home looks like. Unfortunately, few of us can afford our dream home immediately. In fact, many people are often trying to upgrade homes to keep up with co-workers and family members. Don’t let a home be a status symbol of success. This is a trap.
New homeowners often buy as much home as a lender will give them financing for. Rather than being adults and figuring out exactly what your budget comfort is, new homebuyers let lenders dictate buying decisions. While the lender looks at your credit, income and debt obligations, they aren’t considering the annual vacation you take or the private school you send your kids to.
Run your own numbers and know what the maximum a lender will give you and then find a home that meets the budget you are comfortable with. Remember, there is more to life than just owning the home. You have other hobbies and interests, plus homes do require maintenance. They are hungry beasts.
It is always safer to have a cushion in the event of emergencies.
3. No Savings for Emergencies
It isn’t uncommon for new home buyers in Floresville to use all of their savings, even part of their retirement to get into their first home. This puts you at risk of potentially needing to borrow money if an emergency of any sort happened. When you borrow money, you pay interest. When you have savings, you earn interest.
Not keeping that emergency fund intact is a shortsighted approach to buying your first home. Keep six months of monthly expenses set-aside just in case. The “in case” might be if you lose your job, get sick or something breaks in the home. Be prepared so you aren’t scrambling.
4. Making Offers in Hot Markets
A hot real estate market is like a shark feeding frenzy. Everyone is manic trying to get an offer accepted. New buyers can feel this and fear that if they don’t jump in and make an offer over asking price, they won’t win the bid or any bid. This becomes truer as new buyers lose out on homes due to multiple offers. When your agent is aware of these factors, they can advise you how to best approach this type of situation.
The problem is that a hot market isn’t necessarily a guarantee of a good investment. A home might not meet appraisal if the bidding war got too high. Plus new homebuyers might overspend on a home. These are real considerations. Work with your real estate agent to make an offer that is more attractive to sellers than mere dollars. Yes, every seller wants top dollar but he or she also wants the deal to close and often quickly.
Good realtors write offers based on pre-approval letters and can write the contract in a way that tells the seller you are the most serious buyer. This might be a shortened contingency period or waiving of a disclosure. Another is to add a personalized letter to the seller explaining why you are the one to buy their home. Either way, don’t spend just to spend. I have found that a good written letter to the seller has helped my clients in the past in a competitive situation. It makes the buyer more real to the seller and may be the deciding factor between offers. I have never received a buyer letter as a listing agent but have often sent them.
Now that you are fully aware of some ways new home buyers waste their money, you can avoid them at all costs!