When it comes to big-ticket purchases, it gets no bigger than buying a home. That makes it seriously important to avoid costly mistakes. Here are four expensive home-buying mistakes to steer clear of.
MISTAKE: RELYING ON A LENDER TO SET YOUR BUDGET. When you ask a lender for a mortgage pre-qualification and pre-approval, part of the lender’s job is to tell you how big a mortgage the lender will be willing to offer you. Ignore it!
Your lender only cares about two things: 1) Your ability to repay the mortgage and 2) his or her commission on the deal. These folks do not know or care about anything else in your life.
You need to set your housing budget. And that housing budget should be low enough so that you can afford to make progress on all your other important financial goals, such as maintaining a healthy contingency fund for emergencies, getting debt-free and funding retirement accounts.
MISTAKE: BASING YOUR HOUSING BUDGET ON YOUR AFTER-TAX COSTS. If you file an itemized federal tax return, the interest you pay on your mortgage may be tax-deductible. That can be a valuable tax break. But it should not impact how big a housing budget you give yourself. That practice is a sure sign you are stretching into too expensive a deal. Make sure your home is affordable even without factoring in the mortgage interest deduction.
MISTAKE: IGNORING ADDITIONAL COSTS. It’s not realistic to assume that $1,500 monthly rent will be equal to $1,500 monthly mortgage payments. Renters don’t pay property taxes, property insurance and maintenance and repair costs.
Renters don’t need lawn equipment and supplies, nor do renters typically cover the cost of paint and other upgrades.
As a homeowner, you’ll need to anticipate big-ticket items such as a new roof, replacement of appliances and the cost of heating, ventilation and air conditioning.
MISTAKE: ASSUMING A 30-YEAR FIXED-RATE MORTGAGE IS THE BEST LOAN DEAL. A fixed-rate mortgage is the way to go for the vast majority of homebuyers. But 30-years fixed? It’s not the best option, because you’ll pay so much more in interest. My preference is to challenge yourself to see if you can afford a 15-year fixed-rate mortgage, rather than a 30-year.
Yes, the monthly payments are obviously higher on a 15-year loan, given that you are repaying the loan in half the time. But keep in mind that 15-year loans typically have a lower interest rate than the 30-year, so the payment will be surprisingly closer to the payment on a 30-year loan than you might assume.
The real payoff is that you will owe thousands of dollars less in interest charges over the life of a 15-year loan than you will with a 30-year. That’s a big financial advantage. My advice to those in their late 40s or early 50s who are taking out a mortgage: set your sights on a home you can afford with a 15-year mortgage. That assures you will have the mortgage paid off before you retire, and that, my friends, is the key to lasting financial security.