On the market to buy a new home?
If so, this warning is for you.
A new buying phenomenon is in play in the States.
People don’t buy houses based on what they can afford.
People don’t buy houses based on what they’ve saved.
People don’t even buy houses based on what they make.
Most often, people buy houses based on whatever amount of loan they can get from a bank. This, my friends, is the worst way to buy a house.
In most cases, home loans will be a part of the process when buying a new home. And that’s not an entirely bad thing.
The issue, however, is when there is no process. There is only one step.
“Let’s visit the bank and see what type of a loan they’ll give us.”
Then, without a single additional thought, they go looking for a home that is valued at their down payment, plus the value of the approved home loan.
Why is buying a home valued at the amount of money the bank is willing to lend such a bad idea?
1. The bank doesn’t know your dreams.
If owning a home is your most important and exclusive financial goal, then you can buy a home based on what the bank is willing to lend. However, for most of us, we have other dreams. Let’s say you want to take a family vacation to Hawaii. That’s a family goal. If you were to buy less house than you can afford, that vacation might be a possibility instead.
2. The bank doesn’t set loan amounts in your best interest.
Banks do what is profitable for them. They loan you the amount of money that they think will be most profitable for themselves.
3. The bank doesn’t know your plans.
If you’re planning on transitioning to a one-income home because of the birth of a new family member, sickness, or retirement, then the bank’s math (to determine what you can afford) will likely be inaccurate.
4. The bank isn’t going to care for you when you retire.
Who is?
You.
It is your job to make sure you have money at retirement. Your job to be sure that you don’t spend too much on a house.
Don’t outsource the ‘how much can I afford’ question when buying a home.
Instead, I suggest deciding how much you want to pay for a home. Calculate that based on your own values and preferences. Then when you visit the bank, if they offer you a larger loan, you’ll know that you don’t have to get a house that expensive because it’s not part of your financial plan.
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