For prospective first-time homebuyers, the decision to put a down payment on a dream home can have long-lasting effects. If you’re in the market for a home purchase, take note: Homeowners can find themselves in a situation where it’s hard to keep up with mortgage payments and pay bills. It’s part of a growing trend you want to avoid. Read on to find out how not to end up what’s called “house poor.”
The term house poor is used to describe people who have bought a home they can barely afford. Those who are house poor spend a large portion of their income on costs associated with home ownership. These costs can include mortgage payments, property taxes, maintenance, and insurance. After these expenses, those who are house poor don’t have much left over for other expenses, let alone save for retirement.
The last thing any homebuyer wants is the stress of not being able to meet their financial obligations and save for the future. Before you start hunting for a home, use a mortgage affordability calculator to make sure all of your expenses have been accounted for.
When looking to buy property, one of the biggest things to consider is the down payment. While you must make a down payment of at least 5%, making just the minimum down payment might make homeownership less affordable. Also, anyone who puts down less than 20% on a home purchase must pay for mortgage default insurance.
This insurance pays out lenders in the event you’re unable to pay back the mortgage. Calculated based on the amount borrowed, the premium can add up to tens of thousands of dollars on top of the final purchase price. If you can, save 20% or more to avoid the need to pay for the insurance.
When it comes to picking a mortgage rate, don’t make the mistake of going only to your bank out of familiarity. Also, don’t accept the bank’s first offer because you might be able to get better rates somewhere else. It’s worth shopping around for the best mortgage rate.
Alternative lenders like trust companies and credit unions can often offer lower rates. Take advantage of discounts offered by these lenders. You can also check with a mortgage broker who will do comparison shopping for you. A discount—even at a fraction of a percentage point off the posted rate—can lower the monthly payment and save a significant amount in interest over the life of the mortgage.
The house poor buy bigger homes than they need. The added cost of mortgage default insurance and higher monthly payments at posted interest rates combine for a lifestyle that’s more expensive than they can afford.
Choosing a home you can afford, avoiding mortgage default insurance, and searching for a discounted interest rate will result in lower mortgage payments. You’ll thank yourself later because lower payments leave more in your pocket to cover everyday expenses and allow you to save for the future.