The prospect of purchasing a home is exciting, but it’s a big commitment that shouldn’t be taken lightly. There are many factors to consider when deciding on a budget for your new house. Usually the first step in the process is to speak with a mortgage lender to see what you actually qualify for. The number they give you isn’t necessarily a number that works for your wallet. Most people can figure out what mortgage payment they can afford, but it’s never a bad idea to sit down with your financial advisor and get their opinion before you start the process of buying a home.
I recently met with my financial advisor Ted Williams from Ameriprise Financial to talk about advice that he gives his clients regarding the purchase of a home. Ted tells his clients that buying a property requires a team approach and they want to be sure that they have the right people in place that will help them. This team includes Ted, a realtor, a mortgage lender, and an insurance agent. He adds that finding professionals that you feel like you connect with and who respond to your questions and needs is more valuable than just working with a big name that you have seen around town. It’s never a bad idea to ask someone that you trust for a recommendation. Most importantly, Ted said that his job as a financial advisor is to first help his clients look at what can go wrong, so they can plan for what can go right. It’s good to find out what his clients’ goals are. Is this a starter home, second home, or permanent home? Most people can’t afford the home of their dreams when they are a first time buyer and need to be realistic about that.
Ted also said it’s important for them to realize how much money they actually have to put down on the property. Can they do 20% to avoid PMI? Do they have another property that they plan on selling to cover their 20%? Would it be better for them to turn their current home into a rental? He speaks with many of his clients about the possibility of being a landlord and a lot of them aren’t cut out for it. They struggle with the fact that they have to treat it like a business and that’s not always a warm and fuzzy feeling.
It’s crucial to determine how much money you will also have set aside in your cash reserves. Appliances can break and many things can go wrong with a home. He also said it’s vital to look at what would happen if someone lost a job, died, or became disabled. Most group disability insurance policies only pay $50 per month. He said you have to read the fine print because they usually assume you are getting social security and that is not always the case. Social security disability benefits aren’t always approved and sometimes it can take multiple times applying. If you pull money out of your investments it can sometimes count against you as well. Sometimes they will pay retroactively, but how do you get by while waiting for your money? Also, is there proper life insurance in place in the event that a mortgage holder dies?
A popular questions clients ask Ted is if they should consider a 15 year mortgage over a 30 year mortgage. His advice on that depends on the client. He says if you are the type of person that isn’t disciplined to invest extra money, than a 15 year mortgage might be a good option. But if you are a disciplined investor, a 30 year mortgage might be better. If investments are earning between 8-10%, and your mortgage rate is between 4-5%, investing the extra money is probably the better option because you can earn more money. Ted said that the total rate of return for the S&P 500 for the past 10 years is 126%. The 10 best trading days during that time produced a 97.9% rate of return. 10 days were responsible for 78% of the return! The point in his story is, if you are investing money, be consistent and stay invested. Emotions can come in to play, but logic says that it would be almost impossible to try to determine those best days to invest.
Ted recommends that you shouldn’t bite off more than you can can chew when it comes to the purchase of a home. Make sure you still have money left over after paying your mortgage payment for the things in life you like to do. It’s usually not a great feeling to be house poor and not be able to do anything but sit in a house -sometimes without furniture because it wasn’t in the budget! Ted feels that buying a home should be fun time, but sometimes it isn’t. Spouses may have a different idea as to what they want in a house. Sometimes friends and family can be giving conflicting advice and people can be emotional. Having a realtor, lender, and financial advisor can help make it a less stressful experience.
If you are looking for a financial advisor or would like to get a second opinion on your current investments, Ted Williams can be reached at (717) 431-0522.