Avoid common mistakes by homebuyer
Tips & Guide

Avoidable Mistakes When Buying Your First Home

I have no regrets about buying a house. I like where I live and what it has provided for me. But, after a few years of trying to figure out my finances, I’ve learned that I made mistakes along the way that I could have prevented, costing me thousands of dollars and years of debt that I didn’t have to take on.

Making mistakes while purchasing a home can not only be costly, but they can also jeopardize your future and diminish your quality of life dramatically. Because buying a house often entails substantial amounts of money, mistakes can be particularly costly.

If you know you plan to stay in the same place for at least 5 years or longer, I believe everyone should buy if they have the financial means. Make sure to conduct a lot of research (which is ridiculously easy) and avoid the mistakes I did as a rookie!

Rushing into Home Ownership

In May 2016, I went with a friend to look at a condo apartment in anticipation of her unit being completed a few months later. The one we visited wasn’t for sale, but I liked what I saw: granite countertops, stainless steel appliances, and a $115K price tag. When I notified the developer that I wanted it, he agreed to put it on hold for me.

I texted my father the idea and some photos, and he texted back ‘Looks good. I will give you $20,000 max. Love Dad.” (If only all financial issues were resolved so easy!)

I went to my bank the next day, signed a 5-year fixed rate mortgage at 3.39%, with a 5% downpayment. I gave my roommate a month of notice that I was moving, and within no time, I had the keys to my new home. Literally, this was how I bought my first place.

In my shallow, consumer-driven mind, I did it – I bought a home to show off to the outside world. In reality, it couldn’t have happened without my father, and I made way too many of the dumb mistakes that I could have easily avoided.

Mistakes and Missed Opportunities

While I can appreciate that the process and home ownership has taught me A LOT – the perfectionist in me is PISSED that I missed a few detailed opportunities to do it better, including:

My down-payment was only 5%.

In Canada, when you put less than 20% down, we’re required to pay mortgage insurance, which added $3,600 (3.6%) to to principal of my mortgage. Compound that over the life of the mortgage, add an additional $1,789 in interest, and I’ve made the bank $5,389 richer at my expense because I was impulsive and didn’t do my research. At this low price, there was no logical reason to not have saved 20% ($21K). And to add salt in the wounds, I will spend a boatload more interest by financing 98.6% of the home’s value.

I accepted a higher interest rate than I needed to.

I only worked with my current bank and agreed to a 3.39% rate. It turns out that I could have gotten a 2.99% rate at the time by using a different lender. While 0.4% difference might not seem like much, it works out to be over $2,000 extra in costs in just 5 years, or $10,000 over 30 years. That’s an expensive mistake that could have been avoided with 5 minutes of internet research.

I accepted a closed 5-year fixed-rate mortgage.

This means I’m stuck with a set interest rate (and cost) for 5 years. With a closed mortgage, I cannot add extra money to the principal whenever I want. There are some options available, but I’ve basically signed a contract to pay the bank a set amount of interest no matter what for 5 years.

At the time, I didn’t anticipate my burgeoning desire to crush debt. Since then, interest rates have dropped even lower, and I’m stuck paying 3.39% while my home-owning peers are paying around 2.5%. (Huge cost difference over the life of a mortgage).  At this moment, the bank is keeping 53% of my current payment in the form of interest!

Read also: 14 Things You Can Do Today To Improve Your Finances Tomorrow

I chose a 30 year amortization for my mortgage.

I know I did this to keep my immediate costs low, but I was screwing myself over in the long term in the form of interest costs. People my age graduate university with higher debt at a higher interest rate, and the student loan office forces them to repay in 9 years. I had no student loan, and no reason not to tackle this in a shorter time period (15-20 years).

I could have spent just $10,000 more and got a 2-bedroom unit and a roommate.

A roommate would have earned me $6,000 net a year, and would have justified the extra cost in just 20 months, and added positive cash flow every month thereafter. Before my partner moved in (3 years later), I would have owed $8,000 less on my mortgage right now, and would have $18,000+ extra in equity.

I financed a new car one month before buying my home.

This consumed much of my cash flow. I needed wheels and had no available savings (because of reckless early-20s spending). I had to finance the car, and actually thought I was getting a great deal because financed payments were comparable for a new car to a used one. However, I wasn’t accounting for depreciation and the 6 years it would take to pay off the $23,000 loan + interest. Buying used would have avoided these blows.

I had little job security.

This is probably my dumbest mistake overall. I was on just a 7 month contract with my current employer at the time, with no guarantee of it being renewed, and I bought a new car and a new house. In fact, the person who left my office creating the vacancy was running in politics. If he lost, he was returning to work, bumping me out. I signed up for major financial obligation, gambling on a provincial election! Granted, I could have made money somehow, but I was already stretching myself, and the pressure would have been crazy.

Read also: What Is a Side Hustle, and How Do I Get One?

What I Would Recommend to a Rookie Buyer

Purchasing a home should not be a hasty decision. Allow yourself the time and patience necessary to locate a suitable property. If you’re interested in a house, the initial showing is a good way to get a feel for it. But that’s not all; you should hold off on signing the buying contract for a bit longer. First, a thorough follow-up visit is required to completely inspect the house. It’s not unusual for questions to develop that were not addressed at the initial consultation.

Though I love my home, but I would have approached the purchase with a few changes. For anyone interested in buying, here are some money tips from another rookie:

Take advantage of the most affordable housing wherever you are.

Don’t buy big or expensive to start, and don’t inflate your lifestyle. Start smaller with a home where you can save a sizeable down-payment, and your cash flow allows you to make larger-than-minimum payments. This will reduce the interest you pay and earn you equity quicker.

When purchasing a home, the total costs are often underestimated. Because not only the agreed-upon purchase amount must be paid, but also notary and land registry fees, brokerage fees, and the real estate transfer tax. You must also pay the following fees to the bank: Provision fees, commissions, and bank fees are frequently charged in addition to the loan’s interest.

Read also: 7 Simple Ways to Brighten Up Your Home

Secure financing

You should check for feasible financing and know your financing limit before making a purchasing decision. If you already have equity, it’s a plus. You’ll need a bank’s loan offer for this. The simplest way to do this is to go through your home bank, as they already have all of your sales information, including income and expenses.

It’s best to get many offers from banks and financiers. Financing is just like any other business. A commodity (money) is lent in exchange for money in this case. You’ll be astonished at how much of a difference there can be. Allow this bank to give you a financing commitment if you have settled on a financing offer.

It is generally advantageous if you can demonstrate to the seller that you have the financial resources to make a purchase once you have located the proper product to buy. As a result, you’ll be able to secure more agreements with your competition.

Read also: 10 Finance Tips From an Empty Nester

Save 20% to put down (if possible)

You’ll avoid mortgage insurance costs (which are simply added to the principal of your mortgage), along with the added interest costs of financing more house. You’ll also protect yourself from a potential drop in market housing values. After insurance costs, you often only own 1.5-2% of your home starting out. If the market dips just a few points, and you factor in the costs to sell, you’ll potentially be forced to take a sizeable loss if you ever need to unload it.

Find the best available interest rate.

I didn’t do this and it is still costing me. There are great websites out there like RateHub.ca who compare rates for free, so there is no reason not to do some basic research to save you thousands of dollars.

There are usually clear disparities in real estate financing conditions due to market conditions. Because it is frequently a substantial sum funded over a long period of time, even minor variations in the input factors (interest rate, etc.) have a significant financial impact. The funding idea is especially important because it is frequently made up of several components, each with a different weighting. As a result, a comparison of various offers and concepts is recommended.

Read also: Why So Many People Fail at Becoming Debt Free

Know if you want a Fixed or Variable Rate.

Fixed rates lock you in for a period of time (usually 5 years), but they protect you if rates rise. On the flipside, if rates drop, you’re stuck (as in my situation). Also, if paying your mortgage off quickly is a priority, a Fixed Rate might not allow you to pay the sizeable amounts needed.

Choose a property with income potential (or even just a roommate).

Don’t use this cash make your lifestyle more flush. This is cash to be used responsibly; an emergency fund, home maintenance fund, or extra mortgage payments.

Buy a home close to work

Before you buy a house, you should have a clear idea of how it should look, where it should be placed, and in what condition it should be. Of course, the infrastructure (transportation links, neighboring shopping facilities, etc.) must also meet your requirements.  Almost everything about a property can be changed – except its location. So, when it comes to buying a home, don’t overlook the importance of location.

When you buy a home close to your office, you’ll cut down on fuel and car maintenance expenses majorly, and could possibly negate the need for one or more cars (if one or more owners can walk).

Increase Your Mortgage Payments Early

Recognize the massive savings that are to be had when you pay your mortgage down quickly, especially early on. When you’re saving, compound interest is amazing. When you’re repaying a massive piece of debt, it works against you. An extra $100 biweekly will shave YEARS and THOUSANDS OF DOLLARS off of your mortgage. (Be sure to ask your lender about this before signing).

Ensure your income is secure

And you’re making enough to cover the mortgage costs and to save for any unforeseen home expenses. Houses constantly require cash attention, so don’t set yourself up for failure by living to tightly.

Making Peace With Past Mistakes

It took making some avoidable mistakes for me to really learn about what it means to finance and own a home. Now that I know better, I can do better.

The reality is that the costs associated with my $105K purchase are mere fractions of the costs incurred in many parts of the country, and has allowed me to gain valuable knowledge without setting me up for financial ruin.

Moving into the next phase of my life with a partner, planning for a family house, kids, retirement etc., I feel more confident than ever moving into the next purchase more knowledgeable, confident and prepared.

What is your reasons for buying a home? What is your biggest concern? If you already own, what is one thing you wish you had done differently?

AboutJames

My work covers a few topics: personal sustainability practices, eco-friendly technologies and the link between personal action and global consequences. You can expect to learn actionable and practical information to help you become more sustainable – often with the side benefit of being healthier, saving money and having fun

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