Five Ways to Save Thousands on Your First Home Purchase
So, now that you’re keeping an open mind on places to live and looking for less home than you can really afford based on last week’s article, let’s get into this second article on housing. This final article will close out our Focused Frugal February! This article is from Forbes, entitled “5 Ways to Save Thousands on Your First Home Purchase.” The home buying process is not an intuitive one, so this article gives some good ideas on things to look out for as you get started.
This article discusses specifically things to look at once you have found the home you want. Before we even get to that point, I want to discuss my recommendations for the price of your home. It essentially so boils down to this: don’t buy more home then you can afford.
Now, in talking about what you can afford, I don’t mean just barely afford. I mean comfortably be able to pay your mortgage, all of your other bills AND save in the same month.
A lesser known idea is to also get a mortgage that you can afford on one income. For example, my wife and I are planning to grow our family in the next year or so. Part of that plan includes Kayla quitting her job to stay at home with our future kids, turning us from DINKs (Double-Income, no kids) to SIKs (Single-Income with kids) very quickly. As you can imagine, this will greatly affect that amount of house we can afford, not to mention affecting everything else in our lives.
Now, this extreme may not apply to many of you, but if if one of you were to get lose your job or just hates your job and wants to quit, knowing that you can afford the house on one income is one less thing to worry about.
With that in mind, let’s jump into this article and how it can help you save thousands on the home buying process.
When you find the home of your dreams (that won’t break your budget), feel free to jump up and down. Once you’re done celebrating, it’s time to jump into the paperwork because while there can be a lot of emotion tied into buying a home it is at the end of the day a business transaction.
Contingency clauses are your friend
The first step of the home buying process will be for you, the buyer, to give the seller an offer as part of an offer letter, along with a percentage of the planned upon down payment also known as earnest money. A contingency clause is a part of the offer letter that allows you to state valid reasons in order to back out of the deal. Some of the reasons behind the contingency clause can include if:
- The loan falls through
- You lose your job
- The appraisal comes back higher than the market value
- The home inspection comes back with bad news (more on this in a moment).
If this, of anything else you have in your contingency clauses, were to come true, you can still back out of the deal without losing your earnest money. Not only that, but if you did not have these clauses you might still be on hook to buy the home! Contingency clauses are your first line of protection and should be reviewed by you and your real estate agent before providing an offer.
Of all the things we had to spend money on as part of the process of buying a home, the home inspection was the most valuable. Home inspections are what can reveal to you that the pearl you thought you found might actually just be a rock. Flipping homes is a big business. There are some that do it very well and others that do just enough to get an unaware buyer on the hook.
Fred, our home inspector, went through everything in the house with us. Not only that, but he told us what was really a big problem, what should be repaired/ replaced in time and what was just something we should simply monitor.
Having your home inspection allows you to go back to the seller and deduct repair expenses from the offer, have the seller cover the cost of repairs or pay for it at closing. If you opt for them to pay for it at closing, I would suggest going out and getting a quote for the work on your own as opposed to having the seller take this step.
Having a home inspection is one step of the home buying process I will never skimp on just to save a couple hundred dollars. It could cost thousands later on.
Shop for the best mortgage
This is something that is expected, but never emphasized. Using the company your realtor recommends is not always the best option. Take the time to shop around. You could save yourself thousands in closing costs and then many more thousands over the life of the loan. Also, something that I learned personally from our home buying experience is that you want someone who will work with you and your specific circumstance. I became very frustrated with our mortgage broker when he made some assumptions based on “the average home buyer” without actually asking us if that was our plan. So, make sure that you check the fees and make sure that you get someone who wants to work with you and not just shove paperwork out the door as fast as possible.
In addition to shopping for the right mortgage company, you’ll also have to shop for the right type of mortgage loan. A traditional 30 year loan may be a good option for you, but if the difference between the 30 year payment and the 15 year payment still fits within your single income budget, then that’s absolutely a path to be considered. This one move alone could save you 5 or even 6 figures over the course of the loan.
For example, Kayla and I just refinanced our rental property this past fall. In doing so, we actually increased our monthly payment, but shaved off 10 years of payments and will save over $81,000 in interest. That’s like saving an entire college education or multiple brand new cars.
Avoid PMI, if at all possible
PMI is short for Private Mortgage Insurance. It is a fee that is only incurred when you are not able to put down 20% of the value of the home at the time of purchase. The rule of thumb is that you are a more risky loan if you are not able to pay 20% of the value of the home during the purchasing process. Meaning that you may be more likely to default on the loan. Avoiding PMI could save thousands in both the actual monthly cost of PMI and the interest rate that the bank gives you.
However, there are some instances where PMI is not avoidable. In these cases, check with your mortgage company if there is a minimum amount of time that PMI must remain on the loan. Usually, this will be at least 2 years. You can also call your mortgage company after you pass 20% in equity on your loan to request that PMI be removed from the loan. Often there will be a lag in when the you pass the threshold for PMI removal and when the mortgage company actually removes the fee.
Examine your HOA contract
This one may not be applicable to everyone, but if it is applicable to you it is critical. Finding out that every home has to keep their lawn at 1.5″ grass height and that you can never change anything about the outside of your home is not something you want to find out after you’ve just made a 15 or 30 year commitment.
HOAs can provide some amenities/services that may be beneficial for the added cost sometimes including maintenance and even taxes. Regardless of what the HOA covers, being completely aware of the HOA rules before even making an offer on the home is a good idea.
Wrap It Up!
Really what this article is saying is “do your due diligence.” The home buying process can be extremely complicated and having the right mindset that every step and every person you work with is deserving of some research will arm you with the information you need to be successful.
What tips have you learned from purchasing your home? Or if you are looking to buy, what information do you want/need? Let me know in the comments below!