Buying a home is expensive. Whether you’re looking to buy your first house, a cottage, a second rental condo, or up-size to a townhouse – you’d be financially wise to crunch the hard numerical data before signing for that big mortgage. Depending on the size of your down payment, your budget, property maintenance costs, or surprise repairs you may be heading towards a mortgage meltdown.
A mortgage meltdown is what happens to nice people when the dream roof over their heads costs more than they can afford. Now I’m not squawking about that whole subprime lending mortgage mess, but rather the case when well-intentioned folk go to the bank to get a regular mortgage and fail to add up all the real costs before moving in.
For most of us, our mortgage represents our biggest debt and the only kind financial experts consider good debt. But an over-your-head mortgage is one of the quickest routes to serious financial trouble, or even bankruptcy!
So before looking at current mortgage rates or shopping for that perfect home, perhaps take a second, chill out, and consider these 6 surefire ways to avoid a property with a mortage that leaves you in the poor house. Avoiding a mortgage meltdown and living in a home you can afford is preferable.
1. Crunch ALL the numbers.
It pays to crunch ALL the numbers and know ALL the costs before viewing homes and falling in love with a property. A too-high mortgage coupled with unaccounted for monthly costs could leave you resorting to credit cards and lines of credit to pay everyday expenses – a downward spiral that could cost you thousands in interest. And forgetting to add up all the costs of property ownership could leave you scrambling for extra cash.
So before setting foot in any property find out all the costs, even hidden fees, and do the math with a simple Mortgage Calculator.
Don’t Forget These Costs or Fees:
- Buyer’s or seller’s taxes
- Property taxes
- Paperwork filing fees
- Lawyer, realtor, banker, or land transfer fees
- Condo fees
- Maintenance costs
- Utility costs
- Parking costs
Also, don’t be afraid to see the impact that various mortgage rates have on your monthly costs by using the Mortgage Calculator. You’re less likely to feel the chill of a mortgage meltdown if you face the financial facts and crunch the numbers.
2. Practice Your Mortgage
Knowing what you can afford could spare you financial catastrophe in the future. An excellent way to see how a mortgage feels, and to know if you can truly afford it, is to practice paying it before you buy. Seriously.
How to practice your mortgage:
Pay your landlord your rent, and then take the difference between that amount and your anticipated mortgage cost and put this additional money into a high- interest savings account to use later for your down payment.
If you can’t come up with this additional monthly cash, then you know the mortgage price is too steep and you need to either continue saving for a bigger down payment or look at lower-priced homes.
3. Get a Home Inspection
Getting a home inspection done before you make an offer on a home may be the best money you ever spend. A home inspection costs around $500 and uncovers unseen problems that may cost you thousands of dollars down the road. A home inspection also serves as a negotiation tool with sellers, as they may fix flagged issues or reduce their selling price. Take the time to find the right home inspector, and be aware that it might not be the one your real estate agent recommends. Check references, ideally from homeowners who have been in their home for a few years so that any potential troubles have surfaced.
4. Don’t Buy Someone Else’s Renovation
Falling in love with the seemingly fresh look of paint, new flooring, or a freshly planted garden can be a financial disaster if the structure of the home is not sound. The previous homeowner may be trying to disguise something that really needs an expensive repair underneath. Be sure to look past a new bathroom or kitchen renovation and learn what lurks beneath the surface. You may discover that new plaster and paint are a facade disguising mold, water damage issues, or a cracked foundation. These repairs could cost you thousands and make your dream home a nightmare.
5. Buy a Smaller Home
Palatial palaces cost big bucks in terms of buyer’s fees, down payment size, mortgage interest, home maintenance (don’t forget lawn care), and utilities. Buying a smaller home can reduce all of these costs. For example, let’s assume you pass on a $300,000 mortgage in favor of a less expensive $275,000 loan. The mortgage price difference of $25,000 is substantial indeed. Assuming a 25-year mortgage at a 5% interest rate, your monthly payment is around $150 less, saving you a total of $18,844.26 in interest over 25 years, compounded monthly. Add it all up, and a $25,000-less-expensive home saves you $43,844.26 in interest plus principal on the mortgage. And this calculation doesn’t even include closing fees and maintenance costs! With all this saved money why not retire a year sooner? This is the new math, people. Need more incentive to play with the numbers? Try the Mortgage Calculator!
6. Negotiate Your Mortgage
Don’t be afraid to shop around and ASK for a better deal. Asking for a better mortgage rate is free and could save tens of thousands of dollars over the years you live in your home.
But before sitting down with a prospective mortgage lender, get your credit score so you know where you stand. You can find your score online for around $25 at Equifax or TransUnion or write in and get mailed your credit report for free. If you have a good credit score then be set to bargain. Ask lenders for a better mortgage rate, shop around, and play multiple offers off each other. A half a percent rate reduction could save you thousands over the span of your mortgage, so it’s well worth your time.
If a lender offers you perks like gift certificates for furniture, loyalty card points or a trip, take a pass. These so-called perks come at the cost of a higher rate. If the banks are not budging on their offer, consult with a mortgage broker. Mortgage brokers are paid finder’s fees by banks and these fees generally do not differ from bank to bank, so the broker has limited incentive to act outside your best interest, thus finding you the best deal possible.
Final Thoughts
These six surefire steps spared Carl and me from buying a toooooo expensive property while living in the uber expensive Canadian city of Vancouver, B.C. years ago. In fact, after running ALL the numbers and crunching the hard financial facts we opted against home ownership and continued renting our affordable apartment. This single decision was heart breaking since we both wanted to own our home and had a solid downpayment – but the math just didn’t work in our favor. In hindsight I’m relieved we continued along the renting path and saved more money until we were in a better position to buy in another, less expensive, city. For us, putting emotion aside and letting the numbers keep us sane saved us from a mortgage meltdown.
Got some additional tips for avoiding a mortgage meltdown? Got a mortgage story?
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Your two cents:
The most important of all is #5 “Buy a Smaller Home”. Soooo True! Not only do you get to pay back the loan sooner, smaller also means cheaper to maintain (lower taxes etc.) Buy what you can afford, not what you whish you could afford.
good points, kerry!
i agree with “buy a smaller home” to an extent — plan ahead, is my addition to it. i’ve seen a lot of people buy a home that was just the right size for a couple a few years ago and then have a baby (or twins!!) and suddenly realize that that 1 br condo isn’t big enough and that the value of their current place has gone down in value.
eeks!
i agree wholeheartedly with the idea of considering a different area, as you and carl did. real estate is all about location, location, location, but location means different things to different people and there isn’t one perfect location for everyone.
one piece of advice that i got when buying a place was that the home that you buy to live in is not the “be all and end all investment” — it is an investment, sure, but it’s your home. it’s the roof over your head. don’t get trapped into thinking too much about which things will be good for resale value later etc etc. you are more than likely not the star of a renovation/real estate reality show.
Thank you for this article…it could not have come at a better time. TMB and I are in our early 30s and we’re looking to buy a home…but I’m afraid we’re more emotional than practical. We have an outstanding rental home that we can afford comfortably – now might just not be the right time to move (but oh how we want to!)
So how does inflation figure into your cost savings scenario? In the US, if you saved 25,000 in 1979, it would only be worth $8500 today. Home value (normally) just barely keeps pace with inflation… I am not sure how to ammortize these values but I am pretty sure they don’t just cancel out.
Great article and wholeheartedly agree although as a mortgage broker, I would say skip the hard negotiation with your bank and go directly to a broker to find a lower rate. We can access the big banks as well so if you really want to be placed somewhere specific, we can make that happen! Plus it will save you time and hassle. Ask yourself, if you are such a valued client of your bank, why didn’t they offer you their lowest rate the first time around? Why would they give it directly to a broker bringing them the client but not to someone who has been banking with them for 10 years? If you don’t want to use a broker — at least use that logic for negotiations!
Not every situation can be grouped in with yours, however, your raw guidelines are a great place to start if you’ve never experienced home ownership. All of these points can be summed up into one statement – don’t buy above your means. Not only is this important in homes, but with buying cars, monthly spending on credit cards, purchases for your children, large electronics purchases, frivolous beauty costs, clothing, eating out, etc.
We each know what our means are and whether or not we are making frivolous purchases. Take the TIME to learn how to be a home owner – it isn’t a consitutional right to be a homeowner. It’s earned through proper preparation and proper spending habits overall with constant monthly savings. Having all the cash for your downpayment is not the only requirement. Good credit is now just as equally important!!!
D. Advocati – Not quite sure I follow your argument, but if you take the money you’d save by getting a smaller home and investing it, you’ll certainly beat inflation. $25,000 at 5% over 30 years will come out at over 100K. Inflation will erode the value of any cash, but as long as you’re not stuffing money in a mattress, it should be easy to mitigate this.
Timely post. Hubby begins a new job next September and we’re moving 3 hours away. We really need to practice our mortgage. The cost of housing is significantly higher where we’re headed but the salary won’t change much for the first few years at least. Great post.
The best advice on here is to practice with the mortgage payments. By figuring out what your mortgage will be and trying it out for 6 months or whatever, you will see what it was like. When I bought my first house, even though I was renting out a room I felt that I was house poor because of all the unexpected expenses. Please ask the people around you with houses (or condos or whatever) what some of the expenses they are paying that you don’t expect (insurance, water, heat, etc.). It can be a real eye opener!
Great post. I was working on a post on the biggest risk in buying a home vs renting. Seeing this i rewrote my post to include and reference yours. Great job.
My article that links to this one is on my name link.
Good article – what always make me laugh about on-line mortgage affordability calculators is how after inputting a few basic numbers about salary, down payment, mortgage rate, etc., they churn out a huge number that convince you that your first home will be a mansion.
In my opinion, these calculators are especially dangerous for young couples buying their first house who are planning to have children. There is a real danger of buying a certain value of home based on double-income, and then a baby comes along. New parents are initially faced with reduced wages from maternity leave (some companies top-up but usually only for a short period).
Then comes the decision to either have one parent stay home (more reduced income), hire a nanny, or put the child in daycare. Whichever choice occurs, this is a huge expense for most young couples and one that lasts for several years. When my wife & I bought our first house I was worried about the mortgage payment, now 3 years later and with three kids our childcare expenses dwarf that expense. In a nutshell, if you are a looking at a house, but also planning kids, think long-term when figuring out what you can afford!
I hate renting – I love my peace and quiet which I have never had in even the most carefully chosen rental properties. All three of the homes I have bought I have had my peace and quiet – two of them were townhouses in the heart of the city!
Because I knew I was going to buy each time I moved, I actually rented higher than my mortgage payment for a short lease – which really prepares you for the higher bills and unexpected repairs that the house brings.
My favorite advice is not to fall in love with a house. There is so much time to get the “perfect home”. Get an acceptable home that you are mostly happy with. That you can walk away from if the price isn’t right. And never never pay full price that the seller is asking.
This is a great post and the best advice is to save the difference between your rent and mortgage. We did this for two years and it not only prepared us for the cost increase, but it allowed us to double our down-payment.
One thing we didn’t count on was our utilities doubling. When you buy a house, you get a lot more costs that used to be included in the rent. The worst was the water bill, which can be pretty costly in So. Cal.
Back in the good old days, banks wouldn’t let you get in over your head with a huge mortgage. They had front-end and back-end ratios and they were strict about enforcing them. Then, they started lending a half million bucks to anyone with a pulse. It was all very greedy of the banks and it bankrupted a lot of homeowners.