Yahoo Finance Jaspreet Singh: 3 Things To Know Before Buying a House
Buying a house is an exciting life milestone, but an expensive one as well. While there are advantages to being a homeowner, it’s important to consider financial advice from experts before signing for a mortgage loan.
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Jaspreet Singh, host of the popular YouTube finance channel Minority Mindset, has some advice for anyone buying a house in a recent video. Here are three things he thinks you should know before buying a house.
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Understand Your Finances
When a bank approves you for a mortgage, that doesn’t mean you can afford it. As Singh explains in the video, bankers are in the business of selling loans, not worrying about your personal finances.
Once you sign a mortgage, the banker’s job is done. Your ability to pay back the mortgage doesn’t affect them, but it will affect you.
In personal finance, your primary goal should be to build wealth, not to buy a home. That wealth, once you have it, will allow you to purchase property.
But in order to build wealth, you have to implement a plan for your money and a system for spending it. High net worth individuals do this, and they know how much exactly they should save and invest before ever spending a dollar.
Singh recommends a 75-15-10 strategy. With this strategy, 75 cents of every dollar earned is the maximum amount you can spend. The minimum amount you must invest is 15 cents, and the minimum amount you must save is 10 cents.
When it comes to your housing costs, everything must fit into your spending category along with other expenses like food and utilities. Remember, housing costs are more than just your mortgage. To afford buying a home, your income must also cover property taxes, insurance, repairs and maintenance.
Some people struggle to live on only 75% of their income, but according to Singh, the only way to build wealth is to own investments and assets. The wealthy aren’t wealthy because they make a lot of money from their job but because they own assets that earn them money.
This leaves you with the decision of choosing between an expensive home or income-producing investments.
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Understand Your Home Is Not an Investment
To this, some may push back against Singh’s advice by saying that by paying off a mortgage, that money is going toward an asset — your home. But to this, Singh explains that your home is an expense, not an investment.
Consider this: people don’t become rich through paying off their mortgages. They build their fortunes through investments in stocks, businesses and rental properties. The idea that paying off your mortgage means building equity is a misconception that may keep you from becoming wealthy.
Though he no longer practices, Singh is a licensed real estate agent. One of the things he learned during his career was how easy it was for buyers to want to a house that’s a little bit bigger and nicer, pushing the boundaries of what they can comfortably afford.
Buying a bigger and better house can seem like an excellent way to invest in an asset and build home equity you can pass down to your children. However, in reality, it just gives the bankers and real estate agents a larger commission and sacrifices your future investment potential. As Sign explained, banks front-load mortgages, which minimizes your earning potential.
If you get a 30-year, fixed-rate mortgage, well over half of your payments will go toward interest for the first 14 years. A $500,000 mortgage loan with a term of 30 years at a 7% interest rate amounts to paying $5,079.05 off of your principal and $34,839.10 in interest over your first year.
Singh highlights that it isn’t until year 21 that more than half of your payments will go toward your principal. The bigger your home and mortgage loan, the more the realtors and bankers are making. Because of this, it’s crucial to see your housing payments as an expense instead of an investment.
To build wealth, you must set aside a portion of every paycheck for other investments to earn income. Once you build wealth, you’ll be able to afford a better home and pay less in overall interest.
Know What You Can Afford
Before signing a mortgage and taking on a huge debt, it’s important to know what you can afford. Singh says you should account for three things: your monthly payment, the downpayment and move-in costs.
Being able to afford your monthly payment means paying all your housing costs on top of your mortgage and having enough left over for your other monthly needs. As long as you continue to take out money for investments and savings each month, you can be flexible in balancing your spending.
In today’s real estate market, looking for alternatives to paying a large down payment may be tempting. However, a lower down payment comes with risks.
When a bank lends you money, they’re taking a risk. The more money you put down as a down payment, the less of a risk it is for the bank. Because of this, banks offset smaller down payments with higher fees, such as private mortgage insurance and rates. Instead of choosing a lower down payment, Singh recommends saving up to put at least 20% or 25% down on a house.
The other factor you must consider is the move-in costs, which many overlook. Expenses like hiring movers, closing costs, new furniture and home upgrades can add up quickly.
Not properly budgeting for your move-in costs may mean taking out a loan or using your credit card to cover them. Going further into debt can be detrimental to your finances, so make sure to plan and budget for everything ahead of time.
Singh warns against financing anything with a credit card. If you don’t have the money to purchase something like a piece of furniture right now, the money will need to come from somewhere in the future. Using a credit card only increases the financial burden in the future and adds additional interest to the mix.
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