Buying a home is a big decision no matter what stage you are in life. Whether you are a first-time home buyer, or if you’ve looking to upgrade, you should consider these five things as you start looking for a new home.
1. Getting a Mortgage – What to Consider
A 15-Year Or 30-Year Mortgage
A 30-year mortgage is by far the most popular mortgage term length purchased by home owners – chosen by 90% of buyers while a 15-year mortgage only accounts for 6% of mortgage originations1 – but a 15-year mortgage will allow you to build home equity quicker and will substantially reduce the amount of interest you pay to your lender. While 30-year mortgages often provide a lower monthly payment, they usually have a higher interest rate and cost you much more over time.
Pay-off Your Mortgage Quicker
There are several ways to pay off your mortgage quicker than the scheduled mortgage payments in your contract. The most common one is to add extra money to your monthly mortgage payment. The extra money paid can go directly to the principal you owe on your home loan.
Did you know you can also use cash value from a life insurance policy to pay off your mortgage quicker? You can withdraw part of your cash value from your life insurance policy to make a payment against the principal of your mortgage in certain instances. You can also consider taking a policy loan from your life insurance policy to pay off your mortgage as well. The amount of the policy loan would depend on the cash value of your policy and you should check the interest rate you’d pay on the loan as well. If the rate of the loan on your life insurance policy is less than your mortgage interest rate, you may want to consider this as an option for paying off your mortgage early.
Getting Mortgage Protection Insurance
Having a life insurance policy in place that covers the amount of your mortgage can provide you significant peace of mind. As an example, if you have a 30-year mortgage for $250,000 you can purchase a 30-year term policy that pays a death benefit of $250,000 which can be used to payoff the mortgage if something happens to you or someone else who is responsible for the mortgage payments.
Now, let’s say you’ve had the life insurance policy for 10 years and you’ve reduced the amount of the mortgage to $200,000. You can payoff the mortgage from the life insurance proceeds and use the remaining $50,000 for any other needs you may have at that time.
Another feature offered with some term life insurance policies is a Return of Premium benefit. This benefit allows you to receive all the premiums you’ve paid for the policy back at the end of term period (usually 20 or 30 years) if you don’t use the policy2. The money returned to you can be used for anything you choose – including paying down or paying off your mortgage!
2. Pros and Cons to Putting 20% Down
Should I put 20% down on my new home? This used to be a simple question and most professionals would usually tell you yes, so you could avoid PMI (Private Mortgage Insurance) but there seems to be more of a debate these days as to the advantages/disadvantages of putting 20% down.
The advantages of putting 20% down on your new home are that your mortgage would be less and more than likely your monthly mortgage payment would be less. Also, you normally would have a lower interest rate when putting 20% down and would pay less interest over the duration of your home loan.
A disadvantage of putting 20% down for your home purchase is that you may have to find a way to fund the extra money you’d need upfront for the purchase. You’ll have to decide if that money is better spent on establishing your mortgage or possibly something else, like remodeling, an emergency fund, or other needs.
Some advantages to not putting 20% down are that you can avoiding paying monthly for the PMI by establishing an LPMI (Lender Paid Mortgage Insurance) with your lender, you wouldn’t need to come up with a larger amount of cash up front, and you could possibly save money in the long run depending on how long you are planning to own the property. The shorter you plan on owning the property the less putting 20% down may make sense.
The disadvantages of not putting 20% down are that you’d have to add either PMI or LPMI to your mortgage. You may also have to settle for a higher interest rate as well.
If you do decide to put 20% down you may be able to fund all, or part of it, with the cash value or loan from a permanent life insurance policy that you already own. Doing so may also save you money over the time you own the home.
3. Know Your Neighbors
While you want to get to know your neighbors after you move in to your new home you should consider getting to know them before you buy a home. Take the time to really understand the neighborhood you are about to make a big investment in. Are most of the homes owned or rented? This could make a big difference to the current and future value of your home in a positive or negative way financially and socially.
Try to get a feel for the age of your neighbors. If the neighborhood population is older and there aren’t many kids, think about how this will work out for you if you have children and if they need to find new playmates. You should also consider this if most of the people in your neighborhood are single and don’t have kids yet.
It also might be a good idea to take a drive out to the neighborhood during different times of the day to see what activity is or isn’t happening.
4. Look Past the Shag Carpet
Many home buyers miss out on great homes because they can’t see through the current homeowner’s clutter or current décor when they walk through a potential new home. Don’t let the current interior design get in the way of you getting your dream home or a great deal. Try to envision the home empty or with your things instead of what is already there.
The same things should also be considered when walking through a home that has been staged. Many people get caught into a trap of viewing the perfectly decorated home and miss seeing things that may be a problem with the home when it comes to fitting your things into the space.
Try to look at a home as a blank canvas that you can make your home. Paint is still relatively cheap.
5. The Homeowners’ Association (HOA)
It’s incredibly important to see if your potential new home is in a development with a homeowners’ association (HOA). If it is, be sure to get a copy and read the HOA bylaws before you do anything else.
An HOA can include restrictions that you may not be thinking about when you’re looking at a home. Can you put up a fence or rent your home in the future? Is there a restriction about listing your home on Airbnb? These, and other covenants that are part of the HOA, may be a positive or negative for you and should be considered as part of your new home purchase.
Book an appointment and see how an affordable life insurance policy can help you with your new home: