You really want to buy a home. You’ve seen a few houses that you like, but you haven’t taken any tours. Buying a home seems very complicated and you’re unsure about the process. You don’t want to goof up and end up in a 30 year loan that you can’t afford and a house that’s a money pit. Here’s how to cut the learning curve.
Planning
Before you start budgeting for a home loan, or even looking at anymore houses, do some calculations using a good "rent vs buy" calculator. That will tell you whether owning a home makes financial sense to begin with. For example, if you pay $1,000 in rent right now, and you think you might be able to earn 5.5 percent on your investments, then it might only make sense to purchase a $200,000 home. Purchasing a $300,000 home would mean that it could take you up to 30 years for the home to "pay off" financially versus renting, assuming that the mortgage on that home is 4 percent and the term of the loan is 30 years.
Once you’ve determined that owning is the right path, it’s time to plan your budget for the mortgage and then do a quick calculation using a mortgage calculator. You want to figure out how much you can afford to spend on a mortgage every month and how much home that will buy. There’s a lot of land for sale in Australia, so don’t get frustrated if you don’t find something immediately.
If you don’t need more space than you have right now, you should try to pay no more than what you’re currently paying in rent. In other words, if your rent is $1,000, try to base your mortgage payment and home price on what $1,000 per month would buy. If you do need more space, try to keep the mortgage payment in line with your needs. So, shop around and see what you can rent for the space you need. If you have a 2-bedroom apartment, and you need a 3 bedroom, see how much it would cost to rent a 3-bedroom place, either a house or an apartment.
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Then, go out and price the real estate market and see what you can buy, based on the rental market.
Choosing The Right Loan
Try to work with a bank or lending institution that you know and trust. All things being equal, the lower the interest rate, the better. Opt for fixed rate loans if you think you’ll be in the home for more than 5 or 6 years.
There are two basic types of loans on the market – fixed and variable. Within those sub-divisions, you have a range of choices, including interest-only options. Unless you have a special need for one of the more exotic loans, stick with a basic fully amortized loan.
Reading The Fine Print
Don’t get caught paying unexpected costs. Read the fine print. Make sure you understand all of the fees, interest, and other costs you’ll pay, including stamp duty and legal fees.
Check Your Credit
Check your credit before you put in any applications. That way, you’ll be prepared for the types of offers you’ll get. Credit scores in excess of 700 tend to get the best loan options. Between 650 and 700 get OK provisions, while anything below 650 is really a gamble in terms of what you might qualify for. Usually, you’ll pay higher than average interest rates at this credit score level.
Keep Your Head Above Water
Once you get your loan, there’s only one thing you really need to do: keep making payments on time. It seems obvious, but many people get in over their head, accepting terms that are unfavorable for them just to get the home, and then they’re stuck with a home they can’t afford.
Others buy a home, then go into debt to furnish it – bad idea. The debt then overwhelms their ability to repay the mortgage. Live within your means, and keep your home.
