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I remember being in my early 20’s and seeing ads in the paper for new homes being built in Long Island, NY. The homes were priced from $18,000 to the high $20,000’s.
I thought to myself, how could anyone afford these homes? I had grown up in apartments and had no clue about home ownership, mortgages and down payments.
I did not buy my first home until I was almost 40. Looking back at my lack of knowledge I resolved to make sure my kids are not so uninformed and have begun teaching them at a very early age about the benefits of home ownership.
Emotionally and psychologically, owning your home provides stability and security for you and your family and is a source of pride for most people. Financially, home ownership is an investment in an asset that will almost always grow in value.
Unlike renting where you can pay someone a ton of money for the privilege of living in their building and have nothing to show for it when you move out, owning your home is like paying yourself with cash options.
When the home is fully paid you live rent-free. If you decide to leave you can sell your home to the highest bidder and often get back more than you put in. I lived in the same apartment for 17 years and paid close to $96,000 in total rent during that time.
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When I moved out, I got absolutely nothing but my security deposit. Had I invested that money in a property I would have been well on my way to owning the property outright.
The truth is that almost anyone with a steady job can plan for and eventually buy a home. You should also be aware of and see if you qualify for programs to help with the purchase of a first time home.
Be aware of some of the barriers to buying a home
According to the NFFC, National Foundation for Credit Counseling, 2018 – Financial Literacy Survey 49% of the nearly four in five U.S. adults (79%) who have tried to purchase a home have faced some barriers.
The top concern for home buyers is the pace of rising prices in the United States. Here are the top 5 barriers to homeownership according to the NFFC.
- Rising home prices (18%)
- Spending Same or More (17%)
- Existing Debt (14%)
- Limited housing options within their budget (14%)
- Poor credit history (13%)
Some of these barriers can’t be control by you. Rising home prices and the supply of homes are two of these uncontrollable barriers. However, your debts and credit history are under your control and can be managed before you start the buying process.
Obtain your credit report and review it. Check any negative items and start working to fix them. Also, review your current debt and work towards eliminating or reducing them.
Be realistic about your purchasing power
Believe that it is possible and realize that owning a home is within reach if you think smart and have discipline. Of course, you have to be realistic and set your sights on a property that you can comfortably afford.
There are many folks who aim too high and find that almost all of their income is going to home expenses. This is commonly referred to as being mortgage poor.
Choose a home that is within your means
Choose a home that suits your family but also fits your budget. Focus on the monthly payments and whether your monthly salary can handle the costs.
It is to your benefit to begin saving as soon as possible for the down payment to give yourself flexibility in negotiating mortgage terms.
Understand the buying process
Unless you’re rich or hit the lottery you’re going to need a mortgage to buy your place. A mortgage is a loan from a bank or private lender that allows you to purchase and own your home while repaying the lender in monthly payments over an agreed time period.
The key components of getting a mortgage are the down payment, the interest rate, and the length of time to repay the loan. It is extremely important that you shop around for your loan to give yourself the best terms that work for you.
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The most common down payment for a private home is 20% of the purchase price, so if your target home is priced at $200,000 the required down payment would be $40,000.
There are, however, other programs available that require as little as 5% or less as down payment. Keep in mind that the smaller the down payment you make, the larger your monthly payment will be.
The interest rate is the second key component of a mortgage and is a critical factor in determining whether your mortgage is affordable for you. Interest rates will vary depending on the down payment you make and the length of the mortgage.
A larger down payment will have a lower rate while a smaller down payment will carry a higher rate. Also, a shorter terms mortgage will have a lower rate while a longer terms mortgage will have a higher rate.
Even a small difference in interest rates can make a big difference in total payments over the life of the loan. Banks have programs that offer “points” to a buyer.
Points allow you to buy down your interest rate at an upfront cost where a point is 1% of the mortgage. For example, for a $200,000 mortgage, a bank can offer to reduce the interest rate by .25% (a quarter of a %) for 1 point ($2,000). You need to perform a breakeven analysis to see if buying points works for you. (see article “Do Points Work For You”).
In general, buying points can benefit you if you plan on holding the mortgage for the full length of the mortgage. Points are probably not a good idea if you may sell the house before the mortgage is paid. Needless to say, the lower the interest rate the better.
The third component of the mortgage is the length of the loan. The most common length of a mortgage is 30 years or 360 months but 15 years mortgages (180 months) is also available. Other term lengths such as 10 years may be negotiated. While shorter terms lead to faster repayment, they also carry more expensive monthly payments.
Owning your home can be the best investment of your life and part of your legacy for your children, so make the decision and begin planning today.
Consider your financing carefully and be sure to choose the options that are right for you. Do your homework, ask questions about anything that is not perfectly clear, and be sure to deal with reputable people. Enjoy the adventure and look forward to a happy home!