Buying a home is the most ‘stressfully fun thing’ you will do. Saving for a home can be overwhelming, but these 5 tips will help you save money when buying a house. You will be living in your dream home (or at least your starter home) in no time at all.
5 Tips to Buying an Affordable Home
1. Calculate How Much You Can Spend
Before beginning your search, calculate how much money you can actually afford to spend for a monthly payment. The “standard rule” is that your monthly expenses should not exceed 36%. The 36% rule is based on dividing your monthly mortgage payments and other monthly debt payments by your gross monthly income. This method, however, is somewhat complicated and takes math that some folks just don’t have the time, energy or effort to calculate.
Instead, look at your annual income and multiply it by four. So, if your annual income is $50,000, you should be able to afford a house that costs $200,000. I say ‘should be’ because some of us carry heavy student loan debt, credit card debt or other forms of debt that affect what you can actually afford.
2. Save For a Down Payment
Save. Save. Save. Do your best to put as much money down as you can afford up to at least 20% (unless you are a veteran or otherwise qualify for a program that doesn’t make you pay Private Mortgage Insurance (“PMI”). What is PMI? PMI is insurance that the lender has to help protect it if you default on your loan. However, it is expensive and a waste of your money!
This is where I have to say do what I say, and not as I do. Like many, I was anxious to purchase a home because I thought home prices were going up, up and away. Well, I was wrong, home prices have fallen somewhat flat for now in Southwest Florida. I only put 10% down, and now I am faced with paying PMI totaling approximately $180 per month. Ouch! This is money that doesn’t reduce my principal. So, it’s ultimately just wasted money (almost $3,000 a year). I traveled overseas for a week-long vacation for less than $3,000.
Putting more money down may also lower your interest rate! Which leads me to my next tip.
3. Compare Lenders
Applying for a loan is a frightening experience. At times you can feel naked sharing so much personal information with a stranger. Well, I don’t mind being naked or talking about my finances, but some people do. When you are shopping for a loan, though, you can’t be afraid to shop around. Sometimes people feel they just have to go with the first lender that approves them; but, this is a common mistake that can cost you money.
Like the Miracles said, “Shop around.” You would be amazed at the different interest rates that may be quoted by different lenders. A mere .25% difference in an interest rate will save you tens of thousands of dollars over the life of the loan
4. Talk to Your Financial Planner
Before you decide to buy a home, talk to your financial planner. Wait you don’t have one? That’s ok, it’s never too early or late to talk about your finances with a professional. They can even assist you with the complicated math to determine what you can actually afford.
I’m lucky that I’m related to an experienced Certified Financial Planner. Because of him, my kids (ages two and four) now almost have enough money to attend Harvard (OK… maybe not, but the tuition for a year at FGCU would be covered already).
Having a good financial planner is your first step to ensuring your financial goals can and will be reached. If you need to talk to someone in Southwest Florida, you should contact:
Dustin Rinaldi or Kodie Fridley
Rinaldi Wealth Management
5. Find a Realtor that You can Trust and Relate To
Choosing a realtor is almost as hard as saving the money for a home and choosing a financial planner. But choosing a bad realtor can lead to a bad buying experience (that will cost you lots of money).
You need a realtor that understands the local market conditions. Is the market flat or is it booming? Is it a buyers’ market or a sellers’ market? We’ve all heard these terms, but you need a realtor who knows how to explain it to you; and, what a fair market value is for the property that you are interested in.
In my day job, I deal with realtors and title companies in the Naples area daily. In Southwest Florida, Naples, Marco Island, Bonita Springs or Estero, I recommend folks to reach out to David Goebel at Naples Best Addresses. Even if Naples Best Addresses doesn’t have a property listing in your preferred location, they will connect you with a realtor in that area. Naples Best Addresses has three active realtors (a family team)- David Goebel, Mark Goebel and Nan Goebel. I would call them as soon as you figure out how much house you can afford. They can be reached at:
Naples Best Addresses
Following these tips will save you money and headaches when buying your first or next home. Good Luck! What tips do you have for saving money when buying a home?