Buying a home in a major milestone in anyone’s life. Their home is a place where they have peace, can plan for the future and of course raise their kids. Also, having a home allows you to pay down your own mortgage rather than a landlord’s when you find yourself renting. Therefore, buying a home can be a great decision to make but only if you do it right which is why in this article, I will share with you 5 facts about homebuying you must know!
Number 1: Real Estate Is Free For Buyers
As of 2019, an estimated 90% of homebuyers in America acquired their homes through the help of a real estate agent yet I still know so many people who try and buy their homes on their own. When I talked to my friends who took this route, I found out something interesting. They thought that as a buyer, you were on the hook for a commission opon the purchase of the home. What a mistake!
The truth is that both your realtor and the selling realtor’s commissions come from the proceeds the seller receives when you buy the home. These commissions can vary but from what I’ve seen it’s not unusual for it to be around 4-6% which is shared by both realtors. So if you’re purchasing a home at a price of $250,000, the 6% commission of $15,000 would be split two ways ($7,500 per agent).
Now, one could argue that the buyer does pay for these fees because the seller will likely incorporate some amount of the commission they will owe into the home’s list price but the point I am trying to get at here is that there is no direct payment to a realtor for you as the buyer. In fact, even if you were paying your realtor, it would probably be worth it as they can add a ton of value to your house hunting envdavours.
Among their duties include studying home listings that fit your tastes and budget, assessing market prices and facilitating contract negotiations, giving you information on the current market trends, scheduling home visits and acting as your representative throughout the whole purchasing process. All this work for just 3% of the total selling price is fair enough. If you were to perform all these duties on your own, chances are you would get fatigued along the line and may be forced to settle for a home that you really don’t want. Therefore, if the thought of paying a realtor as a homebuyer is stressing you out, just know that you’re off the hook until you go to sell!
Number 2: A 20% Downpayment Isn’t Necessary
Ask just about anyone and they will tell you that to buy a home you must put down 20%. Well, this simply isn’t true. In fact, there are loan programs that require a 0% down payment. Now, I am in no way recommending this low of a down payment either but I am just as surprised by how many people think that 20% is a requirement. Let’s go over some pros and cons of putting down a downpayment of less than 20% so you can make a more informed homebuying decision.
If you put down less of a downpayment, the drawbacks that you’ll face include having larger monthly payments which will lower your cashflow every month, make have a lower chance of being approved for financing and being subjected to either higher interest rates, private mortgage insurance or both. If you’re unfamiliar, private mortgage insurance or PMI is insurance you must pay to offset the risk that your lender assumes when you are putting a lower upfront amount towards your purchase. The advantages of buying with a lower downpayment include it taking less time to save up the money for your downpayment and maintaining more cash on hand than if you were to put down more money which can be used to furnish your new place or act as an emergency fund.
Therefore, I highly recommend you weigh the pros and cons of your downpayment before you start your homebuying adventure!
Number 3: There Is No Best Time Buying
While it is generally believed that the late summer or fall is the best time to buy a home, this isn’t necessarily true. This is because buying a home isn’t the same as buying a winter coat or the new iPhone. It is a much more substantial investment that extends into the long term. A winter coat for instance would be cheaper during the summer period when the demand for it is very low. In the winter, you should expect to pay more for it. As for the new iPhone, well it’s going to be most expensive as it is released into the market, and not a year later.
Homes are a whole different ball game, this is because people need a place to live all year round and people buy and sell as they please, or as their unique situations require. Speaking of a home seller’s unique situation, the person in question may be in need of funds for a project and may decide to sell off his or her home at a certain price, and buy another one that costs less. It could also be that the seller has grown tired of the neighborhood where his or her home is located and has decided to move. Another instance is that the seller could be earning a lot more money or has a growing family and has decided to buy a bigger home.
Any one of these instances can occur at any time of the year and can prompt a sale, regardless of whether it is summer, winter, or spring. You may be lucky enough to find such homes for sale slightly below the market value. Once again, depending on the seller’s unique situation. This is why there is no best season or time of the year to buy a home.
Truth be told, the perfect time for you to buy a home is when you are ready financially. It doesn’t matter the time of the year or the season. As long as you have the funds available for a down payment, and you are able to pay off your loan, then you are good to go!
Number 4: The Longest Mortgage Isn’t Always The Best One
As far as loans are concerned, the sooner you pay them off the better off you will be. This is because the longer the loan extends, the more you would have to pay in interest. For this reason, taking on the longest mortgage possible is likely not the best approach however there are a ton of people doing so.
In 2007, an estimated 16% of first-time homebuyers opted for a 35-year mortgage term. This figure rose in 2015, as 26% of buyers went for the same mortgage term of 35 years. Why, you may wonder? If a long term mortgage was that bad, then why are more people opting for it? Well, there are a lot of lenders who would gladly accept long term applications, because as I have pointed out earlier, this will attract more interest income for them over the course of the mortgage’s life.
Now, even if you don’t care about paying more interest, you still may not even be able to get a longer mortgage. Lenders consider the age of the borrower when issuing long term loans so your present age may work for you or against you. There is hardly a lender out there that would want mortgages to extend into the borrower’s retirement age, and for this reason, they set a limit to the age a borrower should be by the expiration of the mortgage term. Most banks set their limit to the age of 65 (which is the average retirement age). However, some lenders will extend this age limit to 75 years old. So, if you’re 40 years old right now and you’re looking to get a mortgage of about 40 years, you may need to reconsider. This is because you will be 80 years old by the end of the term and well into retirement.
There is only one major advantage to taking a 35-year mortgage, and that is in the area of monthly repayments. The longer the loan term, the lower the monthly repayments, but the more interest you will pay at the end of the loan term. If you were borrowing say, $200,000 for a 25-year mortgage at a 3% rate, it means you would be paying back $948 on a monthly basis. If you opted for a 35-year mortgage, then that figure would drop to about $770 payment per month. The repayment figure drops even further if you are on a 40-year term. It will amount to $716 monthly.
Going by these figures and the high cost of purchasing a home, we can understand why a lot of first time home buyers would go for long term mortgages. But as I mentioned already, a longer-term will amount to paying more interest over time. This is because you would have to pay interest on the borrowed amount for a much longer period. If you’re paying a 3% monthly interest on a 25-year mortgage, you would pay interest of about $84,500 at the end of the term. For a 35-year mortgage, you would end up spending as much as $123,000 in interest. This is a significant $38,000 more than the former. For a 40-year loan term, you would have spent $144,000 in interest. This is almost $60,000 higher than a 25-year loan term. $60,000 is a whole lot of money, and I’m sure you would agree that such an amount can be used to fund other endeavors that would improve the quality of your life, both in the short and long term.
Number 5: You Need Good Credit But Not Perfect To Buy A Home
The last tip about homebuying you must know comes down to your credit. It’s actually a common misconception that to get a mortgage you must have a perfect credit score but this isn’t true. If it was, no one would own a home!
But, just because a perfect credit score isn’t necessary, doesn’t mean your credit can be bad either. The better your credit score is, the easier it will be to access more money with better interest rates as well as better re-financing terms.
In case you are wondering what a credit score is, it’s simply an assessment of how well or poorly you have managed your money in the past, with regards to loans, on-time payments, missed payments, and how much of your credit you use. All these taken into account will be used to calculate your credit score. There is no fixed credit score needed when it comes to buying a home, as it varies among lenders. The minimum credit score and the amount you are eligible for would be determined solely by the individual lender.