The reality of the economic problems of the last few years have many people rethinking home ownership. Before you buy a new home, you need to know how the rules have changed.
Rethinking Home Ownership
The problems with the economy and the mortgage industry that we have seen recently have really taught us a lot.
It is still the dream of most people to own their own home, but you have to be a little more aware of the changing times before you go into it.
Here are five new rules that you need to consider when you are buying a new home.
Determine How Much You Can Afford
One of the mistakes that people used to make was to let the mortgage lender tell them how much they could afford to spend on a house payment. However, these lenders make this determination based on a very simple calculation. It isn’t based upon your individual circumstances and finances, it is only based on how much you earn.
Before you start house shopping, look at your monthly budget and decide on your own how much you can afford. You also need to consider things like your long term goals like retirement, college expenses, etc.
When you are rethinking home ownership, you should decide what you can afford, not the lending institution.
Don’t Buy Into Crazy Home Mortgages
Some lenders have developed new mortgages that have all kinds of ways to give you reduced payments in the beginning of the loan. One of these is a negative amortization loan.
Remember that if you have reduced payments now, you’re going to have to make that up at some point in the future. The last few years have taught us that thinking in those terms can get you in a lot of trouble.
Rethinking home ownership means only signing up for payments that you know you can afford, not those that you think you will be able to afford in the future.
Rethinking Home Ownership Means Protecting Your Equity
One of the great things about owning a home is that every time you make a payment, you build up your equity. However, one of the mistakes that people make is to take out a second mortgage or a HELOC because of “wants” and not “needs”.
It might seem like “free” money, but it isn’t. It converts your equity into debt and puts you in a much worse financial position. If something drastic happens in a few years, you will no longer have the security of your equity to fall back on.
Think About Paying Off Your Mortgage
Many people will tell you that you shouldn’t pay off your mortgage early because of the tax breaks you will lose. However, the reality is that most of the interest deductions that you get happen in the beginning or the loan. The older your loan gets, the less of a deduction you get to take on your taxes.
Another important factor is that your mortgage is likely your biggest expense. Think about how much easier it will be to manage your finances when you retire if you don’t have a monthly mortgage payment.
Rethinking your home mortgage means this: if you are over the age of 45 and you plan to stay in your home indefinitely, you should think about making extra payments toward your mortgage.
Prepare and Be Realistic
Real estate has historically been considered a great investment. Even though the market took a pretty big hit over the last few years, it is still a good investment. However, you shouldn’t expect to see the explosive growth in value that we saw in the past.
If you buy a home, consider it as an investment because it will always give you a place to live. Don’t consider it as an investment that will make you a lot of money down the road.
Continue to invest in your retirement plans, etc and then consider any increase in the value of your home as a bonus.
Rethinking Home Ownership
There are not many things that are as satisfying as owning your own home. However, in these times, it’s very important for you be careful on how you manage this important asset.
What Do You Think?
Have you found yourself rethinking home ownership? Do you have other tips for these changing times?
If you have friends who are thinking about buying a home, forward this to them so they can learn the new rules too.
