Common mistakes of first time homebuyers
Purchasing your first home can be exciting, exhausting and a little bit scary. Your aim is to end up in a house that you love and can afford but many people make mistakes that can have long term consequences.
As we sit here in the early stages of a real estate market correction, making financial mistakes while purchasing your first home can be even more damaging to your financial future. So, for this week’s column, I wanted to share a few financial tips for anyone making the plunge into home ownership:
1. How much can you really afford? There are often three different answers to this question. There is the amount you think you can afford, the amount the mortgage lender (bank) thinks you can afford and the amount that you can actually afford.
Sometimes a lender will approve you for a higher amount than you should be spending and sometimes you might think you can handle x amount per month of mortgage payments, but you should really sit down with an unbiased professional financial planner to find out how much you should really consider spending. A realtor or mortgage broker may offer this type of advice but the conflicts of interest that exist with their ability to offer you unbiased advice need to be understood – it’s much better to get unbiased advice from a financial professional.
2. Don’t forget to consider additional expenses. Many prospective buyers only look at the monthly mortgage payment and forget about other costs such as property taxes, insurance, strata fees, repairs and the various utility bills. What happens to your budget if a major repair bill comes along such as a new furnace or roof? You need to be able to deal with these unforeseen financial shockers comfortably as well.
Many home buyers are still looking at variable interest rate mortgages as well which can be scary in a rising interest rate environment. If you’re using this type of mortgage, you need to be sure that your budget can absorb at least 100 basis points worth of increases – 150 points would be better.
3. Keep your emotions in check. Many buyers, both first time and seasoned homeowners have made poor financial decisions after falling in love with a property outside of their price range. It’s imperative that you treat a home purchase as a business transaction and not purely an emotional one.
Another pitfall is accepting a deal that isn’t very good after being pressured into buying something that you don’t feel totally comfortable with. Many sellers and realtors will use high demand (whether it’s real or not) to push someone into acting too quickly. Never be afraid of walking away if you’re not entirely committed.
Buying your first home can be stressful and overwhelming but if you’re aware of the main financial mistakes that others have made ahead of time, you can protect yourself and shop with confidence. A home will likely be the largest purchase you ever make so take the time to get it right.