﻿I moved a total of 11 times in my twenties. And this isn’t including all the temporary stays I
had in between, for less then a month. And I’m sure many of you who have moved
to new cities seeking new opportunities and taking on new jobs can relate. Moving sucks.
So it’s no surprise that so many Americans dream of owning a home. A permanent place you can call
your own. But before you run out the door and put a downpayment on the next dream home you see,
there are few things you may want to consider. Hi, if you are new to the channel,
my name is Tae from Financial Tortoise - a channel dedicated to helping the Sandwich Generation reach
Financial Security. In this video, I want to review some basic rules to follow before you
go out and purchase your dream home. So that when you finally get that home that you always wanted,
you are making the best financial decision for yourself and your family. But first,
I want to give you some broader context regarding home ownership in general, so let’s have a quick
history lesson. For many of us, it may be normal for us to believe that home ownership was always
the American Dream. That’s because for a majority of us, home ownership has been pushed as this
pinnacle of success and security. But that hasn’t always been the case in America. A 100 years ago,
Americans were much more likely to be renters than homeowners. And that’s because mortgage options
that we take for granted today weren’t available back then. If you wanted to buy a home back then,
you likely needed to save up half the purchase value in cash because a typical mortgage in the
early 1900s might have a term of five years and require a 50% down payment. Then came the Great
Depression. This unprecedented economic collapse forced many people to foreclosure and real
estate prices plummeted. In order to stabilize the housing market, the Federal Government created the
Home Owners' Loan Corporation in 1933, the Federal Housing Administration in 1934, and the Federal
National Mortgage Association (now Fannie Mae) in 1938. And It was during these reforms that
the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization
plan, and terms of 15-20 years. These new programs got some major fuel after World War II, when the
low-rate and low-down-payment federally subsidized mortgage helped millions of returning veterans
into homeownership. And the scale started to tip towards home ownership over renting as the new
norm. And we took this concept of home ownership one step further. Not only is homebuying the norm
and the American Dream. It’s a great investment as well! Because home prices always go up, right? For
many of us who have limited experience with real estate, this may seem like a factual statement.
Just look at the real estate market right now. At the time of this video, home prices are at
record high. And this doesn’t look to be slowing down any time soon. However, when we step back
and look at history more broadley, things aren’t so clear cut. Based on one of the most
widely cited home price index, the Case–Shiller index, when we expand out a 100 year time period,
there were several times in history when we had sustained periods of low home price. And this is
looking at the overall national average. When you break down the data to individual regions,
the disparity between cities is quite prominent. Yes, if you purchased a home in Miami or Los
Angeles, your house might be worth more. But what if you purchased a home in Cleveland or Detroit.
I’m not saying you shouldn’t live there because I’m sure they are lovely neighborhoods.
But we should be careful to jump to conclusions that home prices will always go up because the
homes in our neighborhood went up in value the last 2 years. It’s a limited view of a bigger
picture. There’s a lot that I covered. So, thank you if you stayed with me so far. I wanted to
give some broader context to home ownership before we delve into some actionable steps.
The main takeaways so far is to recognize that: (1) One, home ownership is not a must. If renting
works out better for you because you enjoy the flexibility, you shouldn’t be pressured into
buying a home because everyone says to. (2) Two, but if you do want to enter into home ownership,
do not look at it as an investment because you believe home prices will always go up. Categorize
it as a purchase. And I want to differentiate the actual investment property vs. home you are going
to live in. In this case, I’m talking exclusively about the home you are going to live in. Alright,
now that we have that out of the way, let’s get into the good stuff. 6 Action Steps I recommend
you take before you purchase your home. but first if you're enjoying this video and you want to
learn more about personal finance and navigating life as a sandwich generation, I would appreciate
it if you subscribe and hit the like button, because that would really help out the channel.
First, even before you consider buying a home, is to get your debt under control. You might be
thinking? What?? I thought we were going to start looking at house curtains. What are you talking
about debt? Let me explain. When you apply for a mortgage, the bank or the mortgage broker will ask
you about your monthly debt obligations. This includes car loans, student loans,
credit card debt and any other debt you have under your name. The reason is because they are
trying to calculate your “debt-to-income” ratio. The amount of debt you have in relation to your
income. If your “debt-to-income” ratio is high, the bank will consider you at high risk for future
default. So if you don’t have your debt under control, you’ll be hard pressed to find a bank
willing to issue you a mortgage. There are institutions that will give you what’s known as
“nonconforming loans.” Mortgage that does not meet government standards. They aren’t insured by the
Federal Government and will have a higher interest rate. I highly recommend steering clear of them.
There is a reason why they don’t meet government standards. Instead, get your debt under control so
that when you do start shopping for a mortgage, you are looked at highly favorable. Two is to
fully fund your emergency fund. I know. You want that home. But I need to ask you,
“do you have a fully funded emergency savings account?” If you don’t yet, please pause. And no,
your emergency fund is not your down payment. We all have unexpected financial setbacks. Someone
loses his or her job. Someone gets sick. The car needs new tires. And when you own a home,
the number of unexpected events just multiply. I can’t recall how many times something in our house
broke. It’s the water boiler one month. Then the roof starts leaking. And at the same time,
my son suddenly has 7 cavities. Neither our homes nor our lives are predictable. Be prepared. Fund
your emergency fund first. Then start the process of purchasing a home. If you buy a house without
an emergency fund, you are not only increasing your financial risk, but risking all the people
that might be dependent on your decision. Third on our list is to know how much you can afford. We’ve
all experienced shopping at Target without a list and without a budget. I don’t know what happened.
I just walked in with intent on buying milk and for some reason I walked out with a new pair of
shoes for my daughter and a new playstation… for my son. Experts recommend spending no more than
a third of our take-home pay on housing costs. If we can do less, much better. Housing is one of the
most expensive expenses in our budget. Therefore, if it's more than we can comfortably afford,
it can leave us financially vulnerable when something inevitably goes wrong. A good way to
start what you can afford is to get your mortgage pre approved by a bank before looking at homes.
A quick caveat, just because a bank says you can afford a million dollar home based on your debt to
income ratio doesn’t mean you should get that much for your mortgage. It’s just a rule of thumb to
start out with. Also, by having a budget to start out with, you won’t be pressured by real estate
agents who work on commissions. They stand to make more money by persuading you to buy something more
expensive than you intended. This is not to say all real estate agents will do this. I’ve worked
with some great ones who respected our budget. But understand what everyone’s incentives are. Also,
some might try to persuade you to buy by saying if you don’t buy a house right now at this price,
you won’t get another chance. I recommend finding a new real estate agent. Remember, you are in
control. If you have a budget, you know what you are looking for, so don’t let others make the
decision for you. Only buy when everything on your list checks off, including the price. Fourth is to
put at least 20% down. I know, for those of you who may be living in high cost of living areas,
this is a tough order. But know that more money you can put down, lower the financial risk you
are putting on you and your family. Not only will you have lower monthly mortgage payments. But by
putting at least 20% down, you are avoiding what’s called Private Mortgage Insurance, PMI. Banks want
to minimize the risk of lending money on their end. So for people who put less than 20% down,
they tack on PMI to protect themselves against the chance that they might default on their loans.
Essentially, if you are putting less than 20% down, banks believe you are more likely
to default. PMI can range from 0.5% to 1% of the loan amount per year. If you take out a $500,000
mortgage with a 1% PMI, you are liable for $5,000 annually on top of your monthly mortgage payment.
That is additional $417 per month. I don’t know about you, but that extra PMI makes me cringe.
Aim for at least 20% down. Number 5. Stick to a fixed 15 or 30 year mortgage. If you
are comparing at initial interest rates, it might be tempting to get an Adjustable Rate Mortgage,
ARM. That is a mortgage that begins with a lower interest rate, but can increase after
a set period of time. You might be thinking, I’m only going to be in this home for 5 years,
might as well take advantage of the lower mortgage rate. True. You can lower your initial monthly
payments by getting an ARM. But know that there is a risk. At the time of this video, the interest
rates are near historic lows. There is a serious risk that your ARM could eventually cost you more.
Maybe much more. As the Sandwich Generation, you are busy with trying to manage a full household.
Why bring more complexity and uncertainty into your life? It’s hard to forecast where our life
will be in the next several years. Our plans and circumstances can quickly change. Go with a
traditional 15 or 30 year fixed payment mortgage with 20 percent down. If you are struggling to
afford that, the chances are your budget might be stretched too thin. Don’t allow yourself to be
financially vulnerable. Number 6 is to make sure you shop around for mortgages. Consumer Financial
Protection Bureau report finds nearly half of borrowers do not shop for a mortgage. Instead
we settle for our home bank or the lender that sent us the latest mailer. Comparison shopping is
crucial. Mortgage brokers do not have a fiduciary responsibility to pursue your financial interests.
They might have incentives to sell certain mortgage products because that’s the company’s
bottom line priorities for that month. Shopping around gives you a broad perspective on the
mortgage market and you can see the trending rates. To verify if what the lender is quoting
sounds reasonable, you can also check out Freddiemac’s latest Primary Mortgage Market
Survey. I’ll have a link in the description below. Getting the right interest rate is probably one of
the biggest financial decisions you can make in your lifetime. On a $500,000 30 year mortgage,
a 1% interest rate can mean the difference of $94,000 in interest paid over its lifetime.
That’s a lot of money. We spend hours figuring out which Amazon seller has the best water bottles.
The least we can do is invest the same amount of time selecting the best mortgage provider.
Congratulations if you’ve stayed with me so far! I very much appreciate you willing to watch this
video and learn. There’s a lot I just covered, so I want to summarize for your understanding.
1 - Get Your Debt Under Control 2 - Fund Your Emergency Account 3 - Know How Much You Can
Afford 4 - 20 Percent Down Is Best 5 - Stick to Fixed 15 or 30 Year Mortgage 6 - Shop Around For
Mortgage Thank you guys for watching. If you found value from this video, please hit the like button,
leave a comment and subscribe to the channel so that you don't miss out on any of my other
upcoming videos. I firmly believe that being part of the Sandwich Generation doesn't have
to mean financial stress. With careful planning and preparation, we can thrive during this stage
of life. Help me spread the knowledge. Thank you again and I'll see you in my next video.