Why You Shouldn’t Run to Buy a House Because of Low Rates

by Martin

Interest rates are low. Shouldn’t you be sprinting to the bank to apply for a home mortgage?

“Sometimes the smallest decisions can change your life forever.” — Keri Rusell

The answer is no. Interest rates can be as low as humanly possible, but if your finances aren’t together you shouldn’t be buying anything, let alone a home worth hundreds of thousands of dollars.

Last week when I covered real estate horror stories, I mentioned how a friend of mine had given me his feedback based on his experiences with approving mortgages for people. One of the biggest issues with young buyers is that they feel that they should be buying a piece of property just because the interest rates are low. He noticed how young folks just wanted to buy a place. They heard that rates were low and that was all that mattered to them. They didn’t think about the fact that they had minimal savings or their credit score was in the toilet. They didn’t think of the long-term consequences that go hand-in-hand with owing over $200,000.

Over the past decade, many real estate rules have been broken…

What are these real estate rules all about?

There used to be conventional thinking when it came to buying your first home for your family. The following traditional rules have gone out the window:

  • House would equal about 2.5 x your annual income.
  • You would put down 20-25%.
  • Your monthly expenses for owning a place wouldn’t exceed 30% of your gross pay.

Now we try to buy places with very little down, don’t run the numbers, and act purely on emotion. This isn’t an emotional decision. This is the rest of your life that we’re talking about. Are you okay with being in debt $300,000? This isn’t going to go away anytime soon. It’s going to take you a long time to become debt free. Your finances are going to be restricted to say the least.

I want to take a few minutes to throw out a few questions right now:

How long do you plan on living in the place?

A home purchase is a wise move when you want to live in that community, you see yourself raising a family, or you want to settle down for good. So we’re talking a decade plus. Not a few months.

What are you plans with the place?

I ask this for one simple reason. Too many young people are getting this idea that they can make a quick buck by flipping a place. I have one thing to say about that.

Stop watching shows on flipping properties!

It’s not easy. Materials aren’t cheap. You’re likely not that handy. The expenses will add up and eat you alive. I remember a few months ago I had a tenant coming into my rental. I was screwed with a few last minute issues. I had to bribe a buddy with vodka to show up and bail me out! Don’t let this happen to you.

If you plan on flipping a property, don’t. Do some research first. It’s not that easy. Basic maintenance adds up and costs a pretty penny.

The good news is that I’ve possibly just saved you thousands of dollars and emotional stress. It’s all good. I’ll take a vodka and water the next time you see me.

What can you do right now to plan for buying a place?

If you want to buy a house with your partner or plan on settling down in the near future, that’s awesome. You don’t have to run to the bank to apply for a mortgage so that you can take advantage of current rates.

What can you do right now to plan for the home purchase that will eventually happen?

Keep on saving money.

You can never have enough money for a down-payment. Just keep on saving money. Cut the expenses, work extra hours, drink at home, and do anything possible to put money away for your first home purchase.

Fix your credit score.

How’s your credit score? If it sucks or is just average, you can work on it right now. Actually, you have to work on it right now. A poor credit score is not cool. Fix it. Deal with it.

Stabilize your income.

What’s your income like? I personally don’t care, but the bank does. They want proof of a stable income. That should be your priority right now. Nobody wants to loan money to someone who they don’t trust.

Figure out exactly what home ownership is all about.

This is the most complicated decision that you’ll ever have to make. Read about it and look into it. Stop watching lame reality shows about people who can’t sing. See what buying a place is all about. Talk to friends that have gone through this process recently. Get some answers. Find out. Inform yourself.

Now finally…

What’s the deal with low-interest rates?

A low-interest rate is obviously a good thing when it comes to a mortgage. You want a low rate. But buying a home because rates are low is like getting married because weddings are cheap. It makes no sense!

If you find a low NPBS Variable Rate or your bank offers you a number that you’re comfortable with and everything else is together, you can save some serious money with low-interest rates. First, you have to take care of your own situation.

That’s what I have to say about rates. I would love to hear from you guys.

Have you felt the bug lately to buy a place or to move out? Please share your experiences with us…

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{ 7 comments… read them below or add one }

1 Money Beagle

We re-financed in late 2011, which is putting us on a great path to build equity in our house at a much more rapid rate. For me, there’s no need at all to move. We have a great house in a great location that satisfies the needs of our family.

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2 Martin

Congrats on getting through the refinancing! One of my friends went through this recently and he said it was a long process.

How long have you been in your current house?

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3 Retire By 40

Buying a house is a big commitment. You’ll have to pay property tax, maintenance, repair, insurance, and more. If you’re not ready, then renting is better. Once you have a family, a house is great though.

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4 Martin

Hey Joe, haven’t see you here in a while!

I agree with the family part. Once you have a family and are ready to settle down, it makes complete sense. However, buying a place isn’t the next natural thing to do. It’s okay to take some time after to college to travel, test out different jobs, date a little, and figure out what you want out of life.

And good point on the fees! Those damn property taxes never go away :(

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5 Edward Antrobus

Obviously, it’s better to owe money at a lower interest rate than a higher interest rate, but borrowing just because rates are low makes about as much financial sense as buying something just because it’s on sale.

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6 Martin

I like that analogy Edward. It makes no sense to buy something JUST because it’s on sale.

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7 Crystal @ Prairie Ecothrifter

We were trying to decide whether to use our saved investment cash to pay off our rent house loan or to use as a downpayment on a third property. We decided to pay off the rent house mortgage and will look at our options again next year.

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