The need for housing makes owning a home a goal for many young couples. But not everyone knows how to achieve that goal.
Below is the sharing of Eric Roberge - a famous personal financial advisor for Forbes, Fortune, Wall Street Journal magazines. Eric Roberge and his wife also use this 4-step consideration strategy before investing in real estate.
Consider the appropriate down payment rate
Eric Roberge says that while he can put down less than 20% of the total price of a home, he often opts for a larger down payment. Paying more also means you can lower your loan ratio, which reduces your monthly interest payments. The trade-off is that the value of your investment doesn’t usually increase quickly, but rather gradually over time.
Eric Roberge and his wife used the proceeds from the sale of their current home to put a 30% down payment on a larger home. But he says this isn't a good option for everyone.
In fact, there is no general formula for the bank loan rate to buy real estate, but most experts advise against borrowing an amount equivalent to 70-80% of the property value to buy.
The most important thing is to consider your ability to repay the debt. If your ability to repay the debt is good and your income is high, you can borrow the maximum. If your ability to repay the debt is low and you cannot withstand the pressure, you need to reduce the bank loan ratio.
Don't spend more than 20% of your income on buying a house.
Next, consider the monthly and annual costs of owning a home. Eric Roberge typically advises his clients to keep these costs to no more than 20% of their gross annual income.
Annual real estate ownership costs include mortgage principal and interest, taxes, and average maintenance costs (assuming an average of 2% of the home's value).
If your household income is $250,000, your maximum housing budget should be $50,000 per year. This principle can also be applied to renting.
20% is not a hard number. Eric Roberge likes this number because it helps ensure a steady flow of savings and other important needs in life.
Financial experts advise not to spend more than 20% of income on buying a house (Photo: Tien Tuan).
People tend to overspend. By deliberately starting low and planning for a limited percentage, you create a safety cushion for yourself. If this percentage is too high, it will put a lot of financial pressure on yourself.
When you limit your goal to 20% of your income for real estate, increasing it to around 25% is still a reasonable number.
Don't rely too much on mortgages
Many people prefer to take out a mortgage to buy a home. However, Eric Roberge says this type of loan carries a lot of risk to your future financial situation.
Floating interest rates are like a "double-edged sword". A decrease in interest rates is great, but when the fluctuating interest rate increases compared to the time of borrowing, the interest payable to the bank will increase.
Eric Roberge likes to focus on what he can control in his financial planning. An adjustable-rate mortgage gives him no control over future interest costs, so he often incorporates interest rate options or fixed-rate loans to limit his risk.
Willing to rent when interest rates are high
In the context of high interest rates, Eric Roberge advises customers not to buy a house at all costs but to consider renting. At this time, the cost of renting a house can be much lower than the cost of owning a house as mentioned above.
Renting a house now also gives you more time to calculate the investment efficiency more carefully without having to make a large financial commitment.
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