On this episode of How To Money, Matt and Joel talk about developing a winning home buying strategy. With interest rates for mortgages at all-time lows, a lot of people are considering buying their first home or perhaps an investment property, and might be rushing their decisions in order to take advantage of those rates. But haste makes financial waste, and a huge purchase like a house, that can tie up so much of your wealth for so many years, should be carefully considered before any decisions are made. Fortunately, both the guys have been through this process and have a lot of great tips to direct your thinking and develop a solid strategy to get your dream home.
They’ve pointed out before that buying isn’t always the best option, so the first thing to consider is why you really want to purchase a house. If you’re not sure you’re ready to live in the city you’re in for another decade, or if you have a lot of existing debt or poor credit, or if you just live in a very expensive market, it might be a better decision to continue renting. However, if you’re willing to look at your home as an investment – what they call “house hacking” – then there may be room for a purchase after all. House hacking can be as simple as having roommates to as complicated as finishing out a basement so you can rent it on AirBnb. As long as the house is a way to generate income, instead of eat it, a purchase can be offset by the money it brings in, or at least it can make your own cost of living low enough to justify your purchase. It can also take the pressure off your first house having to fulfill all your dreams – instead, you can buy a “good enough” house, live in it for a couple of years, and then move out and rent it out as a second source of income.
But not everyone wants to be a landlord, and as Joel points out, “the worst landlords are the landlords by default.” If this sounds like you, then your strategy should include saving up at least 20% of the purchase price as a down payment. This is an important number because it helps you avoid having to pay for private mortgage insurance, or PMI, plus “you have more skin in the game,” they say, making it “the smartest, least risky way” to go about buying. Factoring in maintenance and upkeep of the home over time is important, too – they say about 1% of the home’s purchase price annually is a good way to budget for that. And shopping around for financing is incredibly important to make sure you’re getting the best interest rates, paying the least in fees, and saving whatever you can on closing costs. But before you even begin to look at homes, it’s important to know that your credit score and debt-to-income ratio is in a good place first. Get all this great information and so much more to make your home buying experience as stress-free as possible on this episode of How To Money.
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