Some people consider their “forever home” the one in which they finish raising their children. To see their kids through high school or college in one home that will help them live out their lifelong dreams and desires. Others consider it the home they will downsize to as empty nesters. The home they will live in until their life here on earth is done.
However you define it, buying your forever home can carry with it a lot of emotions. These emotions can make the experience fun, but they can also add complexity to the transaction. Sadly, there are a handful of common mistakes people make when buying a forever home that costs them dearly.
1. Timing the market
“Hey Grant, I’m thinking of buying my dream home. Is this a good time to do it? How does the market look?”
The heart behind this question is great. Most want to take a lesson from the recession and ensure they don’t buy a home at “peak” pricing. This, or they want to get a good deal. Both are worthy endeavors. However, this question is a common mistake.
Here is the truth: no one can time the market perfectly. Trying to buy your dream home and time the market at the same time is setting yourself up for failure and disappointment.
What’s more, timing the market shouldn’t be a large concern for your forever home. It’s your forever home and not your forever investment. The primary purpose of this purchase is to live in it as a dwelling. Will it also be an investment? Sure! It will beat renting and help set the future of your finances up for success. However, the investment portion should not be the primary concern. Only real estate investors should be concerned about timing the market during a purchase. When the success of your investment largely depends on the deal you get when you buy, then worry about timing.
When you are buying your dream home, focus your attention elsewhere.
2. Improper timing of your finances
This is the timing question that you should be asking: “Is this the right time for me financially? Are my personal finances set up to make this move now?”
Again, buying a dream home is emotional. This desire is deeply ingrained in many of us which can cause us to jump the gun and make a purchase before making sure other areas of our finances are properly equipped.
As a whole, you should not be making a large purchase like a forever home if you are just now starting to save for retirement. In an ideal world you are already maxing out or coming close to maxing out your annual retirement savings contributions. Additionally, you should not have any “bad” debt. Things like credit cards and high interest student loan debt should be paid off first.
A solid foundation of sensible retirement savings void of any high interest debt can help you determine if now is the right time for you to buy your forever home.
3. Not counting the cost
Almost everyone counts the cost of the new mortgage payment. Conversations with the local mortgage professional are often centered around what your down payment will be and what the mortgage payment will be. But what about the other costs associated with this new home? How do these new costs impact your life?
Many times your dream home is bigger or in a nicer neighborhood. Homes like that often carry with them higher costs for taxes, insurance, utilities, HOA, and more. It may not seem like much, but when you add it all up, it can impact your monthly cash flow by hundreds of dollars.
Did you know that your car insurance will also change based on the zip code you are in? Be sure to count all the costs before pulling the trigger on your dream home.
PRO TIP – We created a blog dedicated to helping you stay under budget when buying a bigger home. Check that out HERE.
4. Paying Cash
As mentioned in this blog post, there are typically two options when paying your mortgage:
- Use your assets and pay cash for the home. Then, invest the excess cash flow because you don’t have a mortgage payment.
- Invest now and pay regular monthly mortgage payments.
Time value of money lets us know that obtaining a mortgage is typically wiser. Because of the stigma associated with being “debt free” or having a paid off house, people will choose to liquidate their savings to pay cash for their dream home. For most, this is a bad idea. Especially when you consider how low rates are for home loans.
It’s important to note, there is a difference between debt and leverage.
If you have the cash to pay for the house with your own funds but choose to take a mortgage because the rate of return on your cash will far exceed the rate of interest on the mortgage, you’re not making a debt decision. You are making a time value of money leverage decision.
I don’t want you to remove the emotions when buying your forever home. So much of your life has led you to this moment, therefore, it should be emotional. However, while having fun selecting your forever home, be aware of some common emotions that can lead to poor financial decisions in a real estate transaction of this magnitude.
- Don’t try to time the market
- Make sure the timing is right for your finances
- Count all the costs
- Use leverage wisely
In episode 33 of the Defining Stewardship podcast, Jeremy and I have an in depth conversation on buying a forever home to help add wisdom and love to this extremely exciting decision making process. Click below to hear our discussion.