- Many people make financial mistakes when buying a home.
- These mistakes can have a long-term impact on your financial situation.
- It's possible to recover from even the biggest home-buying errors, like taking out a mortgage you don’t understand.
It's not too late to save your finances after making home-buying errors.
Buying a home can be a really smart financial move -- but only if you are financially prepared and buy the right property. Unfortunately, it can be complicated to navigate the process of purchasing a home and getting a mortgage. As a result, many people make mistakes during the process.
The good news is, it's often possible to recover from even the biggest home-buying errors -- especially if you act quickly. Here are some tips to help you recover from three common mistakes buyers make.
1. Buying too much house
Buying a house that's too expensive is one of the single biggest errors you can make -- and it's a challenge to cope with the consequences because you'll be left constantly coping with high monthly payments.
If you've found yourself in this situation, you'll need to do one of two things to recover; increase your income, or reduce housing costs.
You could work on increasing income by getting a roommate, taking on a side job, asking for a raise or promotion, or looking for a better-paying job. Or you could focus on reducing housing costs by appealing property taxes to see if you can get your assessed value lowered, shopping around for more affordable home insurance, or looking into refinancing your mortgage to a new loan at a lower rate.
If none of these techniques work, then your best and only option may be to try to make it work for two or more years and then sell the house and look for a more affordable one.
2. Taking out a mortgage you don't understand
Another major mistake is taking out a loan you don't really understand. The downside of this is that you could end up with an adjustable-rate mortgage or another risky loan that results in monthly payments becoming more expensive.
If you aren't sure of exactly how your home loan works, contact your lender to find out if your payment is fixed or could change. If your payment is fixed, then you don't need to worry because you'll keep making the same payments until your house is paid off. But if you have a loan with payments that could change, you may want to act.
Often, the best thing to do in this case is refinance if you can get a new loan at a reasonable rate -- even if that rate is a bit higher than you're currently paying. By refinancing, you can avoid the risk that your monthly payments will become unaffordable in the future, potentially leading to foreclosure.
3. Making a down payment that's too small
A small down payment presents a big risk for many reasons.
You could end up owing more money than your house is worth, which could mean that if you need to move or refinance, you would have to come up with extra cash out of your own pocket just to pay off the remaining loan balance.
If you made a small down payment, you could also find yourself stuck paying for mortgage insurance. This is an added monthly cost for an insurance policy that protects your lender.
If you made this mistake, you may want to consider making extra payments on your mortgage to help you build equity first so you reduce the risk of ending up underwater on your loan. You should also pay attention to whether property values are rising, as you can usually have mortgage insurance removed once your property value climbs and your loan balance falls below 80% of what your home is currently worth.
Hopefully, these tips can help you overcome any errors you made in the purchase of your home so you can get your financial life back under control.
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