Heads up soldiers! It’s of paramount importance that you pay attention. The largest debt that you’ll ever lead an assault on is a mortgage. For almost everyone, it will end up being the most expensive purchase. For something worth over $100,000, you’d think one would need to take their time before they purchased, right? Let’s unpack 4 critical actions to make sure you’re on the path to making your house a home and not a burden.
Avoid The Big Risk
The first critical action to take before buying a home is to pay off all debt. Being debt free takes risk and financial stress out of the equation. There’s a whole new world of expenses that comes with being a homeowner. Carrying in existing debt payments on top of these new expenses (repairs, taxes, etc.) creates unwarranted pressure. Who wants to stress over a mortgage payment on top of a car note, high interest credit card, and student loans? Lenders also look at your debt to income ratio. Before underwriting a mortgage for you, they want to determine whether or not you can afford the loan payment. Being knee deep in debt can keep you from enjoying your new home. Freedom from debt helps to lay the foundation for financial peace.
Maneuver Away From Malicious Murphy
Next up after being debt free is to have a fully funded emergency fund. Remember, a fully funded emergency fund is 3 to 6 months’ worth of expenses. This is NOT optional! Remember the good ole days of renting? Back when the maintenance or property manager took care of all repairs? Guess who becomes the fixer upper when you buy a house? That’s right, capital Y-O-U! What happens if your water tank springs a leak or the A/C goes out? You’ve got to be prepared. Murphy’s Law states that “anything that can happen, will happen.” This isn’t meant to scare you, but you must be ready to take on Murphy when he strikes in the form of a 5-figure plumbing issue. It comes down to just plainly using wisdom. Don’t get hurt by ignorance.
Put 10 to 20 On It
Action number three involves how much of a downpayment to make on a house. The minimum you should put down is 10%. Putting down 20% is even better because at that percentage you avoid PMI (private mortgage insurance). If you’re looking to buy in a hot market or are having a tiff with the virtue of patience (I don’t judge), then 10% is perfectly fine. The gap between 10% and 20% doesn’t impact the PMI as much.
There are two major advantages to putting 10% to 20% down. The first is equity. Buying a home is like buying a forced savings account, which is a good thing. Take for example a $100,000 home. If you put 10% down, which is $10,000, you’ve got a higher “stake” coming into your newly acquired asset. This really comes into play if you end up not living in the home long. The second advantage is a lower monthly payment. Keep this inverse relationship in mind: the higher your downpayment, the lower your monthly mortgage will be. Things are better when you put down a Hamilton (10) or a Jackson (20).
Learn Your Lender
The fourth and final action comes down to owning your relationship with a lender. As a general rule of thumb, don’t go with a big national bank when choosing a lender for your mortgage. Many times, you are just a serial number to them in a pool of thousands of people. Instead, go with a credit union or a community bank. You’ll get better customer service because they are usually incentivized differently from a big bank. They pride themselves on building a stronger rapport with you. Because they tend to have different financial objectives than large banks, they’re also able to return profits to consumers in the form of better interest rates.
Another key to owning your relationship with a lender is knowing what kind of mortgage to get. Public Service Announcement: go with a 15-year fixed rate mortgage. You’ll save more money in the long run. A good tool to run a comparison analysis is Bankrate’s Mortgage Calculator. What about paying a 30-year mortgage like a 15-year, you ask? Well, soldier, humans are funny creatures. Creatures of habit that is. According to the FDIC, 97.3% of people don’t systematically pay extra on their mortgages. If you’re a unicorn, I suppose you could pay a 30-year like a 15-year. Discipline is the key if you were to go this route. Just, know that most people don’t follow through with this.
Soldiers, we’ve been briefed on what it means to truly be ready to buy a home. Obtaining large assets require great responsibility. You want your home to be blessing, not a money draining curse. So, preparation is key. How does what you’ve learned change your thoughts on home buying readiness? Oorah!