5 common mistakes when deciding to buy vs. rent
Assuming your rent will stay the same.
One thing renters often do when considering a home purchase is compare their current rent to the potential mortgage payment of a home they could buy. What they often forget is that rents almost always increase over time, while a mortgage’s principle and interest stay the same.
Forgetting to calculate principle pay down.
A second thing renters can forget to calculate is that a portion of their payment goes towards paying down the principle balance on their loan. Each payment brings you one step closer to owning that home free and clear and also can build equity that you can potentially tap in to by selling or applying for a home equity line of credit.
Forgetting to calculate appreciation.
That house you own may also appreciate in value. Every dollar in value that your home goes up in value is an extra dollar of net worth on your balance sheet. Appreciation on a home, typically your largest asset, can be the single biggest wealth building tool available to most people.
Calculating cost to sell.
To piggyback on number 4, there is also a cost to sell. This is very important to remember because a typical agent compensation on a sale is around 6%. If you don’t stay in the home long enough to build substantial equity, a quick sale may end up losing you money.
Calculating upfront costs.
When determining whether to buy or rent it is also very important to analyze how much money it is going to cost you out of pocket. What down payment options are available to me? What are closing costs going to be? These are questions you should ask your loan expert to get a feeling for your upfront investment. Then you can compare this cost with how long you plan on staying in the house. It may take several years to recoup your upfront costs with appreciation or principle pay down. So, if you plan on only keeping the house for a short period of time, it may not be in your best financial interest to buy.
7 things you should never do before buying a house
Buy a car before speaking with a mortgage loan officer.
Buying large personal items on credit can affect your debt to income ratio, or the amount of monthly debt payments that you have relative to your monthly inflow of cash. This is one of the largest determining factors for the amount of home you will qualify for, or if you will qualify at all. Always consult your mortgage professional before making a large purchase on credit.
Use cash to pay off debt before speaking with a mortgage loan officer.
It may seem like common sense to pay off a debt to improve your credit score. However, that’s not always the case. Sometimes your money can be better used to pay for down payment, closing costs, or just keep in your pocket. Always consult with your mortgage professional before burning through that cash!
Put an offer on a house without having a full preapproval.
While you can back out of a home purchase in some instances, there is usually a financial risk to doing so. Deposits on the home may not be refunded and you may have sunk cost in inspections and appraisals. Always make sure to have a full preapproval before you offer on a home so you and the seller are confident the deal will go through without a hitch!
Wait until the last minute to get a preapproval.
Getting back to the last point, most sellers will require a preapproval letter with their offer to ensure they are working with a qualified buyer. In today’s competitive market, if the seller has to wait for you to contact a mortgage company to obtain a preapproval letter, they may move on and accept another offer. Always be prepared before you look at houses with your preapproval.
Assume that foreclosures are the best deal.
There is a common misconception that a foreclosure is a great deal. Just like any other home, there are foreclosures that are good deals and foreclosures that are bad deals. Work with a licensed real estate agent who has access to new construction, existing homes, and foreclosures so they can point out the pros and cons of each.
Assume that forgoing a buyer’s agent will save you money.
Buyer’s agents work for the buyer but are paid by the seller. Often times you will hear of someone enticing you with a “deal” if you don’t use a realtor to represent your purchase. Often times this doesn’t work out in the buyer’s best interest. Always vet out your options to be represented in a home purchase transaction..
Change jobs before speaking with your mortgage loan officer.
Back to that debt to income ratio from number 1, nothing is a bigger killer of a deal than having a change of income that can’t be counted towards a home loan. Always make sure to consult with your loan expert about how changing jobs will affect your approvability before making a decision.
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