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3 Financial Mistakes to Avoid When Buying a Home

3 Financial Mistakes to Avoid When Buying a Home

For most people, a home is the biggest purchase they’ll make in their lifetime. It’s a huge financial commitment, and the average American homeowner spends about a third of their monthly income on housing costs.

With a purchase that significant, it makes sense to avoid making mistakes when you’re buying a home. Common sense tells you that overpaying for a home – spending too much right off the bat – is the big mistake to avoid. An experienced real estate agent, however, can help you stick to your budget and negotiate a price you can afford.

There are a few other less-obvious, costly errors some home buyers make, beyond just the sales price. Here are three financial mistakes to avoid when buying a home.

Ignoring your credit report

Unless you’re an all-cash buyer, every person in the real estate industry will say you must get a pre-approval letter from a mortgage lender before starting your home search. Sellers tend not to even consider offers from buyers without them.

Before getting your pre-approval letter, it’s a good idea to review your credit report. Your credit score could help determine how large a loan amount you’ll qualify for, but it will also affect the mortgage interest rate you pay. Those low, low rates you see advertised are usually reserved for the borrowers with the best credit scores.

You should be able to get a free copy of your report. When you do, inspect it carefully. Look for anything that could be a mistake and see if there are old derogatory items that you can ask a creditor to update.

A better credit score means a better rate, which can translate to thousands of dollars in mortgage interest savings over the course of a home loan.

Putting too little down

It’s sometimes difficult for potential home buyers to scrape together enough money for a down payment on a home. But putting as much money down as you possibly can is a solid financial decision. For one, holding less than 20-percent equity in a home usually means you’ll have to pay for private mortgage insurance (PMI), which typically costs 1 percent of the loan amount per year – potentially thousands of dollars.

Like your credit score, the amount of money you put down will also affect the interest rate you’ll pay. The more money you put down, the less a borrowing risk you are. And the less of a risk you are, the lower rate you’ll likely pay.

It might be difficult to get the funds together, but managing a 20-percent down payment now will lead to potentially big money savings over the years of owning the home.

Not staying long enough

Unless your new home is in a very hot market – at or near double-digit percentage annual price appreciation – it’s usually a financially losing proposition to sell a home less than five years after moving in.

Between your down payment and closing costs, it’s very difficult to recoup your out-of-pocket purchase costs within the first couple of years of owning a home. Sure, your down payment provides some equity when you sell, but you’ll also have real estate commission to pay. Also, the way home mortgages are amortized, you pay a ton of interest in the early years and have very little principal paydown.

If the home hasn’t significantly increased in value, you can end up losing money if you don’t keep the home very long.

The bottom line

As big a purchase as a home is, it makes sense to save every dollar you possibly can when buying one. Avoiding these three financial mistakes when buying a home can help you save money.


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