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.
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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