Ah, Spring has sprung! Growing up in South Florida, I had no clue what the seasons were. As my dad, a native New Yorker, often told me, “Florida only has 3 seasons, hot, hotter, and bleeping hot!” Since I have been living in New York/New Jersey for a while now, Spring has by far become my favorite season. Everything seems new, and a sense of a fresh beginning. From the start of the baseball season (Let's Go Mets!), flowers starting to blossom, birds chirping, and finally some warm weather! It just gets me in a great mood.
Spring also tends to mean the start of the home-buying season. Which is often a new process and a sense of a fresh beginning for many.
Unfortunately, many go into this process blind due to the lack of foundational financial literacy in this country. Fortunately, I have made it my firm’s mission to lead with Knowledge, and an attempt to teach people how to fish. So, if you’re reading this, it hopefully means that you read my last blog, crunched the numbers, and aren't going into one of the biggest financial purchases of your life without the proper tools to make a sound decision.
Since only a small portion of people purchase a home with all cash1, your path to homeownership will start at the same place as almost everyone else; getting a mortgage.
I’m sure you’ve heard the word mortgage, but do you really understand them? If the answer is no, you’re not alone. Like most in the world of finance I’ve found, the industry tries to make you think mortgages are complicated. Mainly because no one has taken the time to explain them to you. So, now that you know you want to buy, here are the basics of what you need to know about mortgages.
The Types of Mortgages
There are a variety of mortgages available, however, there are three main types of mortgages:
Federal Housing Administration (FHA) Loan:
This is a loan designed to help first-time buyers or those on a lower income. For an FHA loan, you typically only need a down payment of 3.5% - which sounds great, but there's a catch. These loans are insured by the government and provided by a bank, so you will need to meet the right conditions to qualify. The down payment for these loans is low, which is a pro, but they are typically seen as a greater risk, which can result in a higher interest rate. If you’re a first-time buyer or have a lower credit score, this may be an option worth considering.
Fixed Rate Mortgage:
If you don’t qualify for an FHA loan, then you’ll probably need to take the route of a standard mortgage. These mortgages almost always require a down payment of 20%. This means if you want a $1M home, you need $200,000 to start the buying process. Once you’ve saved your down payment, you’ll need to consider a few things; How long you want to pay off your loan and whether you want your rate of interest to change. The most common timeframes for a mortgage are 15 and 30 years. If you opt for the fixed rate option, your rate of interest will stay the same for the life of your mortgage.
If you choose an adjustable rate, you’ll only lock in your rate of interest for about 7-10 years. After this, your rate will adjust. This could be higher, or it could be lower. So it’s a bit of a gamble as unless you have a particularly accurate crystal ball, there is no way to know what interest rates will look like in the future.
Choosing the right Mortgage
There are a lot of factors that go into calculating a mortgage. There are also a lot of factors that you need to consider when selecting the right mortgage for you. For example, do you want a 15-year or a 30-year mortgage? For example, if you’ve found your forever home, a longer mortgage might be worth considering. Alternatively, if you’re looking at a starter home or something you won’t stay in for 10 years or more, perhaps an adjustable rate is the right way to go.
When making your decision, you need to understand the yield curve2 as best you can and get your head around the term structure of your loan of choice.
There are pros and cons no matter which mortgage you choose, so the best one for you depends on your circumstances and goals. When you’re making this decision, it can help to have someone experienced in your corner.
You’ve considered your Mortgage, what next?
Now that you have your head around mortgage options, there are some essential steps that you need to consider to assist in things going smoothly with your new home.
Step 1: Read your contract, and read it again
Once you have an agreement to purchase a home, read through the contract repeatedly until you feel confident that you’re happy with it. I strongly recommend consulting a real estate lawyer who can help ensure everything is in your interest.
Step 2: Get an Inspection
You may have been surprised to read this next step, but I can assure you it's important. You need an inspection by a highly competent inspector. I personally learned this the hard way. When I bought my first apartment, I hired someone to come and check the place out. As we moved around my new apartment, I noticed I had no hot water. The guy told me not to worry about it and gave the place a clean bill of health. Fast forward to my first day in my apartment, when I go to take a shower. After running the water for 30 minutes, it was still cold. I went to check my water heater and found there was no power running to it! The inspector I paid for didn’t even check it. This caused me to come out of pocket about $5,000 to fix it.
When buying my current home, I hired the best inspector I could find. After checking my house, he found some plumbing issues and pointed out that my air conditioner was over 20 years old (5 years past the typical expiration date of an air conditioner). I was able to use this information as leverage to lower the price of my home and get the plumbing fixed. All in all, this saved me about $18,000. Cha ching! Cha ching!
The moral of the story here leads us nicely to step three.
Step 3: Get the right people in your corner
There have been two continued threads in this blog. The first is mortgage advice. The second is people. Throughout this home-buying process, you will need help from a lot of different people. A good real estate agent and mortgage banker will help you to find the right house at a price within your budget. Next, as I touched on earlier, you need a good real estate lawyer and an inspector to ensure that you start your life in your new home on the right track. Finally, there is one more person that you need; A good wealth advisor. This to me is the biggest difference between a “wealth advisor” and an “investment advisor.” The people in your corner should be able to advise on the total picture, not just a slice. Especially when your home might be your biggest investment.
Wrapping up: The right House for YOU
A good wealth advisor should be with you throughout the home-buying process and beyond. They should help you through the key decisions along the way, and ensure that you achieve the goals that you set out. If you’re ready to get knowledge on the proper house for you and take the right steps toward your financial future, get in touch with Julius Wealth Advisors today.
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.
Yield Curves Explained and How to Use Them in Investing- Investopedia.com