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Your First Home Comes With Your First Mortgage – Here’s What You Should Know

June 30, 2019 by Guest Poster 2 Comments

buying a home

Recently, I had a Twitter interaction that has had me thinking of going back to the basics in an attempt to reach some readers who may be towards the beginning of their personal finance journey. Around the same time, I had a guest post hit my inbox covering a topic that I had long forgotten – buying my first home. Enjoy this post from Lazy Man and Money reader, Ivana.

If you’re anything like me, you consider the purchase of your first home a milestone in your adult life. After all, nothing quite says “I’ve made it” better than owning a home of your own, and it signals a kind of stability that wasn’t really there in your younger years.

Of course, to get that far, you’ve got to get approved for a mortgage (unless you’re independently wealthy, and if so, I congratulate you). When I first went through the process, I hadn’t the faintest clue what I was getting myself into – and that’s a scary thought because my mortgage represents the largest single debt on my personal ledger.

As it turned out, I learned a great deal from the process. I just wish someone had sat me down and given me the lowdown on what to expect before I jumped in head first. If you expect to be in a similar position soon, you’re in luck. Here are some of the important things you need to know about getting your first mortgage, but didn’t even know to ask.

Lay the Groundwork, or Suffer the Consequences

The first bit of wisdom that I’ll impart here may seem obvious to some, but it never occurred to me before I applied for my mortgage: check your credit reports (all three, I’ll explain why later). The reason I say this is that your credit report may be hiding some surprises that you’d rather not encounter while sitting in front of a loan officer. In my case, I found out from my mortgage specialist that Experian was under the impression that I owed Verizon Wireless about $550 from an account I had closed in 2001. Interestingly, Equifax and TransUnion had no record of the balance.

It turned out that Verizon had not closed my account when I requested it, and instead let the balance continue to build until they sent it off to a collections agency. That agency had never contacted me and only reported the “debt” to Experian. The good news is that I was able to get it worked out and it didn’t impact my ability to qualify for a mortgage, but the lesson is clear: don’t let the fact that you’ve never paid a bill late fool you into thinking your credit reports are accurate. Make sure everything’s right in advance, and also do everything you can to lower your debt-to-credit ratio. Be aware that lenders extend the best offers to applicants with FICO scores of 720 or higher, so that’s where you’ll want to be before applying.

Choose a Mortgage, Don’t Let One Choose You

Another thing that I hadn’t considered when looking for a mortgage was just how many options there are. Seriously, if you’ve never shopped for a mortgage, you’ll likely be astounded by how many lenders there are out there. What’s even more shocking is that you’ll feel like you need an advanced degree to tell the difference between all of the mortgage products you encounter.

So first things first – learn all of the lingo and as much as you can about the various available mortgage types before you try to tackle a mortgage comparison on your own. You’ll need to understand not only the way interest rates work, but also what kinds of fees may be part of the loan (origination, title search, insurance), and any other closing costs that might (or might not) get rolled into your loan. Be aware that it’s going to seem like lenders go out of their way to make it difficult to compare these products, with opaque documentation and the like. Don’t be afraid to admit that you’re in over your head. Use a mortgage broker if you must. Whatever you do, make sure you understand your mortgage before you sign it – you’re going to have to live with it for a while.

Look Out For Gotchas

The last major thing I wish I’d been counseled on before getting my mortgage was all of the various little considerations that go into the mortgage package you’re offered. I call them “gotchas”, only because if you don’t understand what they are before you take out your mortgage, you don’t get a do-over. First, you’re going to want to make sure that your lender has approved you for a mortgage you can actually afford. That means informing them about your real monthly expenses as opposed to just what’s on your credit report. For example, if you have financial obligations like supporting an ailing parent, child support, or any other ongoing monetary responsibility, speak up! Remember that it’s the lender’s job to look out for their own interests – not yours.

Second, scour the details of your mortgage offer to look for things that may come back to bite you later on. The biggest one I encountered is known as a prepayment penalty. This common little trap is the lender’s way of extracting their pound of flesh from the borrower, come what may. The idea is, you’re bound by contract to only pay back a certain amount of your mortgage within specific timeframes. It exists so you won’t be able to save on interest by paying down your principal when you’re flush with cash. The thing many don’t realize, of course, is that such an arrangement doesn’t only apply to unexpected financial windfalls.

It also means (depending on the language in your agreement) that you’ll get hit with the penalty if you sell your home (since you’d be paying down the mortgage with the proceeds). It could also mean you can’t refinance if interest rates improve without paying the penalty, too. And if you’re thinking it’s no big deal, consider that the typical prepayment penalty is equal to 80% of six months’ worth of interest, which can be a hefty sum. The good news (if there is any) is that prepayment penalties typically phase out after one to three years, but if you’re subject to one, it may mean you’re trapped in your mortgage for that amount of time even if you have an emergency and need to sell your home.

Welcome to Homeownership

If you’ve made it this far, that should mean you’re at least twice as prepared to go out and get a mortgage than I was the first time out. Don’t rest on your laurels, though. What I’ve covered here is by no means encyclopedic – far from it. On the contrary, getting a mortgage is one of the most complex and consequential financial decisions anyone can make, and they come in all shapes and sizes.

That’s why the best bit of advice I could ever give to anyone who’s about to look for their first mortgage is to take their time. Do as much research as you can beforehand because the more you understand in advance, the less daunting the process will be. The results will be better, too. After all, the last thing in the world that anyone should want is to have the home of their dreams come with the mortgage of their nightmares. With any luck, I’ve done a bit to spare you that fate – the rest is up to you.

Editor’s View

My own experience was helped quite a bit by the support system I had. My mother was right there with me. My older brother was buying a house around the same time. One of my best friends, who I had lived with previously had recently bought his first house. My real estate agent was the spouse of a good friend. My closing agent was a groomsman at my wedding. It was almost impossible to imagine a better “Dream Team” of support.

Despite all that, I was still very nervous. So if you feel nervous, that’s to be expected. I hope you can surround yourself with at least a few people who have a lot of experience.

Filed Under: Real Estate Tagged With: buying a home

Ask the Readers: Don’t Buy a Home?

June 29, 2015 by Lazy Man 2 Comments

That title may sound extreme, but the sentiment seems to be a growing trend amongst some extremely intelligent personal finance bloggers.

When intelligent people make intelligent arguments, we can learn from the discussion. I just hope I can hold my “other side.” You, as always, will be the ultimate judge.

Who is deciding that owning a home may not be right for them?

Miranda Marquit says she may never own a home again. James Altucher is more certain.

My inspiration for writing this post comes from Evan from My Journey to Millions. A couple of weeks ago, he expressed a mild disdain of his current home ownership situation. (My font can’t show the sarcasm that comes with the link.)

However, the best article I’ve read against home ownership comes from Jim Collins who writes Why Your Home is a Terrible Investment.

The Case Against Buying a Home

Those authors all agree about the typical headaches of home ownership. It’s work. You have to fix stuff. Or worse, pay other people to fix stuff. And that stuff never seems to be cheap.

I find Evan and Collins take of home ownership from an investment perspective most most interesting. Collins creates a list of 20, yes twenty(!) things that a bad investment would have. They include: illiquidity, high commissions, leverage, never paying dividends, requirement of paying interest, immobile, lag inflation, fragile, heavily taxed. You should definitely read it.

The points he brings up are all correct and extremely defensible…

… but…

Why I Think you Should Buy a Home

As with everything in personal finance, opinions are… personal. Marquit writes that owning a home is a problem when a new job opportunity comes up forcing a move. Conversely Evan stated the stability of home ownership in raising a family is one of the benefits.

I’m usually “all-in” on one side of any argument. I don’t like to be wishy-washy. However, in this case, I can certainly see both pros and cons.

Allow me to tell you my own home ownership disaster story… and then still make an argument for home ownership.

A little more than ten years ago, 2005, my mother expressed concern about the real estate market. My brother had been trying to save money for a down payment for a home. Whatever he seemed to save was negated by the rising cost of homes. If he saved $20,000, the price of homes went up $30,000 meaning that he “lost” $10,000 by sitting on the sidelines. My mother’s concern was that home ownership would never be attainable at the current rate of rising prices. A few decades before that she bought the home we grew up in for around $24 in beads.

What a shame it would be lose out on the American Dream forever!

Around this same time, my roommate got married and started down the path of starting a family (selfish jerk, right?)

These two circumstances lead to my mother helping me (well completely financing a down payment) for a condo costing nearly $300,000. Things were awesome as the value appreciated above $300K.

However, as we all know, the bubble burst. The value dropped to around $175,000. I had “lost” over $100K, some of it was even my own money (as opposed to my mother’s).

What a disaster of epic proportions, right? Not exactly. And here’s why I think you (or most people) should buy a home.

I found a wife, we moved to San Francisco, and I rented the property. It’s been rented for almost 9 years now. I lose money on it every month from just the mortgage. It’s a headache being a landlord. I spent $8,000 putting a new heating and cooling unit in it last year.

Wait this isn’t convincing you, is it?

The value has increased from that low to above $230K. It’s still less than what I paid for it, but the mortgage is under $170K now. I have nearly $60,000 in equity.

That’s some serious forced savings. Would I have taken $6000 a year and put it into savings or investments? I like to think I would have. However, I’m not so sure.

I have refinanced it with a 15 year mortgage and I’m 3 years into it. The money going to principle is growing and growing to the point where it is nearly $1000 a month. In 12 years, I’ll certainly have some repairs to make. However, at that time, I’ll get around $1500 a month after expenses… which could cover my car payments or other expenses I have.

My wife has a similar story with her condo that she bought before we met.

We even bought an investment property together at a market low in 2012. That property is up around 20% in value and our equity just seems to grow with it. (We are even making money each month even with the 15-year mortgage.)

I’ve laid out a financial case for being a landlord. It’s easy to claim owning a home is better when a renter is financing a large part of it.

However, what about our purchase of the home we live in? I humbly suggest you consider the alternative. Few people are handing out free living arrangements, which leaves renting a home.

The “investment” in renting a home is worse than buying a home. You never build up equity. You are subject to increases in rent that may surpass inflation. If you don’t like that, I hope you enjoy expensive moving costs. If you have a family, let’s hope that move isn’t out the city and school system. You might not have to fix anything, but you can’t change things either.

Finally, the real American Dream, financial freedom may become the unattainable. Let’s presume your rent is $2000 a month today. That’s $24,000 a year. Using the rule of 4% (or more accurately the the rule of 25), you’ll need to save $600,000 to throw off the annual income for that rent.

What’s worse? That $2000 will likely be $3000 in ten years due to inflation. Did your $600,000 investment grow to $900,000 in that time while you drawing it down to pay for your rent? I hope so.

This is certainly a valid path to financial freedom. The intelligent people that I mentioned above, surely know this.

Personally, I’d like to be on the receiving end of payments and I even with compound interest, saving a half million dollars seems like a lot of money.

Now it’s time for you to weigh-in. What do you think about buying a home?

Filed Under: Real Estate Tagged With: buying a home

Ready to Buy a Home? Let’s Find Out

June 25, 2015 by Guest Poster Leave a Comment

There is something to be said for renting. Actually, there is quite a lot to be said for it. There is so much to be said for it, in fact, one wonders why anyone would ever want to become a home owner in the first place. Homeownership is the single most recognizable aspect of what we call the American dream.

Without a doubt, there are certainly some benefits of owning vs. renting. When owning, one can do any internal home improvement project one wishes. External projects are possible. But some require a permit. Owning a home is beneficial for credit, auto insurance, and anything else where status and credibility are considerations. Owning a home can also be a valuable investment that can pay off big later in life. So if you think you’re ready to become a homeowner, here are a few things you might want to consider:

How to Turn the Purchase into an Investment

Buying a home can be a great investment. But it is not automatically a great investment. There are things you have to do to insure a good return on your investment. The first thing is to make sure you are buying a property that will retain its value. There are many declining neighborhoods that may look nice enough at first glance. But further inspection shows a lot of For Sale, and worse, For Rent signs. Those signs are indicators of declining property values. You can loose your shirt buying the wrong home in the wrong part of town.

You will want to invest in the right kinds of home improvements. Some of them actually decrease property value. Swimming pools are a good example of something that can actually lose you money when it is time to sell.

You will also want to be aware of options beyond selling the family home. One of the most popular methods of extracting value from a home is the reverse mortgage. You can use a reverse mortgage calculator to determine the amount of the home finance assistance you need.

The thing to remember is that a home is not an automatically good investment. But it can be made into a good investment with a little planning and elbow grease.

Are You the Do-it-Yourself Type?

It has been said of swimming pools that they are big holes in the ground where you pour money. The truth is, that sentiment could be used for everything related to home ownership. A home is a series of expensive, unfinished projects. No amount of money, time, or energy will ever see all the little things taken care of.

The question is how you plan to deal with that challenge. Are you the do-it-yourself type? or do you plan to deal with all home improvement projects by picking up the phone and calling in a professional? Both strategies can be rather costly. Doing it yourself requires a bigger financial outlay than you expect, regardless of the project. It will also cost you in property value when it is time to sell. No one wants to buy a house full of DYI projects that you should have never done yourself.

Still, hiring out everything is impractical for all but the 1%. You are going to have to have a strategy that involves both savings, and educating yourself to become proficient at home improvement tasks. If you do not plan for this aspect of home ownership, you could end up greatly disappointed.

Have You Considered the Alternative?

As has already been established, there is nothing wrong with owning a home. But there is also nothing wrong with renting an apartment. Home ownership does not make you a better person than anyone else. It does not make you wealthier. It does not make you smarter or more successful. Just as there are good reasons not to own a car, there are reasons not to own a house. Don’t dismiss the alternatives. Examine them carefully. Make an informed, rather than an emotional decision.

Filed Under: Real Estate Tagged With: buying a home

Buying a Vacation/Retirement Home (Part 1 of ?)

February 18, 2011 by Lazy Man 9 Comments

Three months ago, I asked whether it was time to buy a vacation/retirement place?. Today, I wake up in Newport, Rhode Island, the historic New England town my wife and I have targeted for that very purpose. Yesterday, we looked at a dozen homes… and in a couple of hours we will look at a dozen more.

Turns out that looking at homes with a serious intent to buy, is a lot more work than I imagined. It’s kind of like baseball, 90% is mental, the other half is physical (see famous quotes by Berra, Yogi) . I learned as much in one day as I had learned in a long, long time. I couldn’t begin to tell you all the homes we looked at. Since being able to rent it is going to be an initial requirement, we are looking at many times of homes, not just ones geared to suit our needs. We’ve been looking at homes old and new, some as small as 1500 square feet and some as large as 3600.

The most eye-opening experience has been looking at the homes that are over a hundred years old. I was always told that from a legal real estate perspective, if a room doesn’t have a closet it isn’t considered a bedroom. Yesterday, my wife and I learned that was not entirely true. It depends largely where you live. When I asked about why some of the bedrooms were able to be called bedrooms without closets, I got a simple answer: The clothes hanger wasn’t invented until 1903. I didn’t really anticipate that I’ve had to learn about electric systems (fuses vs. circuit breakers), and sump pumps in the basements. Most visions of a finished basement went out the window pretty quickly. The rooms were not designed for modern furniture or convenience. A number of kitchens were too small to support a dishwasher for example. That’s probably less of a surprise after reading about lack of closets, isn’t it?

In addition to looking at a number of houses today, we are going to have to call USAA and get our pre-approval. We’ll be shopping for mortgage rates. Lastly, we have to figure out how to do all this from California when we move. I anticipate this to be the easy part, but that’s often when the best plans fall apart.

Completely Unrelated News 1 – The new military hotel that we are staying at decided that they would renovate the room next to ours at 8 AM. When I talked to the manager, the explanation was that most people were gone by 8AM for class. Seems like a poor assumption to make. We still haven’t fully adjusted from our west coast time so it feels closer to 5 AM than 8 AM. They said they’d give us another hour, which was not so generous of them. I suppose it was probably too much for them to have mentioned the construction and asked us beforehand. Maybe I’m old-fashioned, but when I rent a hotel room, I expect to be able to sleep in it at any and all hours.

For those who read my last post, this is a different military hotel than the one we stayed at over the weekend that had notified us there would be no electricity for 13 hours of the day.

Completely Unrelated News 2 – I’ll be having a Rex Manning Day – in anticipation of what HP/Palm’s great smartphone, tablet, netbook, webOS announcements will bring. Let’s hope it doesn’t go as poorly as the original Rex Manning Day went. I’m optimistic, as most indications seem to be that HP/Palm is releasing a device with hardware on par with what the iPad 2 is reported to be – same resolution, high speed CPU, and front facing camera.

Filed Under: Real Estate Tagged With: buying a home

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