Yesterday, we met the financial planner who failed to plan for the financial crisis… and lost his $575,000 home because of it.
And I showed you how to avoid falling into the same financial trap.
But that was only the tip of the iceberg…
Buying a home is probably the single biggest financial decision you’ll ever make.
Yet many folks wander into the process totally unprepared… and end up making a financial mistake that affects the next 30 years of their life.
You shouldn’t have to go through that. So today, I’m going to give you my 4 Golden Rules for Buying a Home.
With these tips at your fingertips, you can make this life-changing decision on your own terms.
Golden Rule #1: 15-Year, Fixed-Rate Mortgage
The prospect of paying for your home over a 30-year period can be mighty tempting… on paper.
Your monthly payments will be lower than if you opt for a 15-year loan. But in the long run, you’re flushing thousands of dollars in interest down the toilet.
Folks have a bad habit of valuing the money they have right now over money saved in the future. But you’ll thank me when you’re mortgage-free — and a few thousand dollars richer — in just 15 years.
That said, there are other ways to decrease your monthly payments and actually pay less money.
Golden Rule #2: Maximize Your Down Payment
There are two good reasons for paying as much cash down as you can.
First of all, the less money you finance, the lower your monthly payments are going to be. This gives you a larger disposable income, which can be invested, saved or spent on the little luxuries that make life easier. (I’d recommend a healthy mix of all three.)
Second, putting 20% or more down will mean you don’t have to pay private mortgage insurance (PMI) on your loan.
PMI is insurance for the mortgage company in case you can’t pay back your loan. It’s usually about 1% of your total loan value and is added on top of your monthly payments.
This is an unseen fee that you don’t need to be paying. At the very least, try to pay 20% down to skirt this unnecessary cost.
Unfortunately, there are going to be some hidden costs you can’t avoid. Which brings us to…
Golden Rule #3: Don’t Forget the Unseen Costs
When folks make big, life-changing decisions, they have a tendency to put on their “big-decision blinders” and let everything else fall to the wayside.
They look at their monthly mortgage repayment and think, Yeah, I can afford that. But in reality, they’re overlooking a multitude of unexpected (and often expensive) costs.
Don’t forget to include the price of your HOA fees, property tax and insurance in the cost of your monthly payments.
And don’t forget maintenance costs.
On average, you can expect to pay about 1% of the cost of your home annually on maintenance. For example, if your home cost $200,000, you should budget about $2,000 a year for ongoing maintenance.
And watch out for one-time costs like moving expenses and closing fees. Depending on where you live and how much stuff you have, the cost of moving alone could number in the thousands.
Golden Rule #4: The Emergency Fund
Yesterday, I told you to pay off all other debts before you even think about buying a house.
A mortgage is just about the biggest chunk of debt you’ll ever take on. And if you’re not on firm financial footing when you enter into that contract… it could spell disaster.
Part of that means having a well-stocked emergency fund, which should total at least three–six months of your take-home pay (but eight–12 months is even better).
This will serve as a cushion for emergency repairs… for unexpected costs… or to supplement your income during a financial crisis.
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All the best,
Editor, Money & Crisis