Thought on Mortgages and Home-Buying from Expert SoCal Real Estate Agent, Jeff Landau
The most important part of the homebuying process is affordability. “Can I afford a house?” is also usually the first question you’ll ask when searching for a home. In this blog, we’ve laid out some crucial questions you should consider while looking to buy a house.
A common thought for a first time home buyer is to get a loan where their principal and interest payment is roughly the same as their current rent payment. This is very difficult to achieve unless someone has a large down payment. This thought is from a comfort zone standpoint. If someone has been traditionally making a $2,500 a month rent payment, it is natural for them to want to have a $2,500 a month mortgage payment.
However, when it comes to purchasing a home, it is really best to try to “look into a crystal ball” and think about what your housing needs will be 3, 5, and even 10 years down the road if possible.
Because a home is an “illiquid asset,” it is ideal to have a long-term mindset about the purchase of a home intended to be your primary residence. By illiquid asset, we mean an asset that takes some time to sell. A home falls in this category because selling and buying a home is time-consuming and involves transactional costs. Market risk also comes into play. For these reasons and more, if you are buying a house, you should go into it planning on staying in that house for several years to come.
Get Uncomfortable – Consider Readjusting Your Budget
It is common to stretch into an affordable, yet uncomfortable, monthly payment. This is where the “adjustment principle” comes into play. The adjustment principle is where you adjust to the standards you set. If owning a home is important to you, and having certain attributes of a home is important, then you can look at other aspects of your finances and see where you can cut back expenditures in order to make home ownership a reality.
This being said, you want to make sure you are not over-stretching. You want to still be able to enjoy life and do the things that are important to you. Another factor to keep in mind is that if you expect to receive a promotion or raise at work in the near future, you might want to consider stretching and going for the most expensive home you can afford from the outset instead of changing homes every time you get a significant bump in income.
How can I know if I’ll be able to afford my mortgage in the future?
The biggest determining factors for whether or not you’ll be able to afford your mortgage is your income level and likelihood of your income remaining consistent or increasing. Another factor is the type of mortgage you request.
Are you on a career path where you are likely to be making more money? Are you in a more senior position where significant increases are going to be less likely? Are you dependent on quarterly or annual bonuses? Are you self-employed and have reason to believe there will be significant increases in your profitability?
These are some of the many factors someone needs to consider when determining the purchase price of the home, as well as how much money they want to put down or need to put down, and the resulting monthly payment. Consider that you may need to put a much larger down payment than anticipated in order to keep your monthly payments lower.
The other, and equally important consideration of affordability, is the type of mortgage you apply for. A short term fixed rate mortgage, or an adjustable rate mortgage, can go up in interest rate and payment and could negatively affect affordability in the future. Also, if you own a home and are looking to keep it as a rental property and buy another home, be wary of a Home Equity Line of Credit (HELOC). While a HELOC frees up equity in your home, understand the loan terms. A HELOC may have an interest only payment option for a certain amount of time, after which it converts into a shorter term fully amortizing payment. This can cause “sticker shock” and a much higher monthly payment.
Team 805 Is Here to Help!
Our agents at Team 805 are experts when it comes to the housing market. We’ve got our finger on the pulse, and always have our clients’ best interests at heart. Whether you’re looking to buy a home in Southern California or looking to sell one, we are here for you. Contact us today at … to learn more.