Following the recent home mortgage lending debacle, where new home owners were provided loans they either didn’t understand (balloon payments?) or were under-qualified to actually maintain making payments on, it made me reflect on what I learned around the dinner table from my Mom, the realtor.
Mom said no one should ever go and look at homes for sale until they are pre-qualified for a loan. Don’t run around with a realtor looking at your dream homes, or any homes for that matter, because it you find something that you feel you simply must have, it will either be devastating for you to discover what the actual monthly payments will be, or you may have set your sights too high and then nothing else seems good enough, she admonished.
First, know what you can afford, and then go look at homes at and below this amount. Do not go over this amount, even a little bit, because you will invariably push the envelope into biting off more than you can chew. And nobody likes the taste of envelopes.
The home seller and/or their realtor will appreciate that you are pre-qualified, because they are not wasting their time showing you around. This is why my Mom would never have an open house. “Too many lookie-loos” she told me, meaning the curious neighbors, possible thieves, and general public seeking to amuse themselves and get decorating ideas after a Sunday brunch. She was selling homes in a prestigious community where humble homes began at over a million dollars, and the homeowners valued their privacy.
Before signing on the dotted line, review with your life partner (if there is one assisting you with a home purchase) what your financial life is like now, in five years, ten years, fifteen and twenty years. Why? Because more than likely the loan you will be paying on is for the next 30 years. Got kids? Well, they made need more than orthodontia. How about 4 years in college? Your expenses may fluctuate as wildly as your income.
Make sure you are totally comfortable with the minimum amount due each month, and evaluate if you could actually pay more. If you can round up a few hundred dollars each month early on, you will be delighted to find that your final payment may be due around year 25, as the extra amount you pay can go toward the principal, which then lowers the interest you pay on it. Even one extra mortgage payment annually will help lower your final loan cost a lot.
Remember, don’t let this, the most costly decision of your life, be driven by your emotions. Maybe your future will see higher earnings and allow you to trade up into a bigger, more costly home. A home that takes every spare cent from your pocket won’t be a happy one for its’ inhabitants. A house that prohibits vacations, helping family members in need or even donations to charity, is not a truly enjoyable one. Remember, be it ever so humble (because it was affordable), there is no place like home.