Common Mistakes To Avoid When Buying A Home – Episode 256

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Hello listeners and welcome to the Prosperity Podcast. Today we’re going to be talking about home buying and mistakes that you must avoid when buying a home. Kim Butler, are you there with me? I am Spencer. Happy day to you. Happy day to you as well. So as we were talking before we hit that record button, I think both of us said, oh, this would be a really fun episode. So let’s just dive into it and let’s start talking about those mistakes that people should avoid when buying a home. Well it is funny, you know, a few weeks ago we had a podcast about whether you

[00:59] should buy a home at all and I definitely think that in the long run people should And of course, that’s not going to be accurate for absolutely every person. But today we’ll just focus on you’ve already decided to buy a home and you’re either done renting or you’re in a place where you’ve settled down and you’re really ready to put some roots in and clearly we also know that it’s not always the financial efficiencies that help us make all of our decisions. We can analyze the financial efficiencies and be very clear on which is better or which is worse. But sometimes I just want to acknowledge that sometimes there are peace of mind issues or family circumstances or other ancillary things that frankly have

[01:49] nothing to do with finances. But it appears that they do because they’re making an impact on this financial decision that we’re making. So maybe we’ll talk about some of those as well as the what are going to be obvious financial mistakes to avoid. I think that’s great. So I think the biggest is that people have a desire to put more down than necessary and that is something that is often driven by peace of mind. And what has happened is we’ve forgotten that our own cash has value many times when we’re buying a home we start with the 20 percent down that is sort of normal sometimes 10 but most cases 20 yet a desire crops up if we have a little bit more cash to put maybe 25 or 30 percent down.

[02:42] And it is because we have forgotten that our own cash has value and we don’t think about the fact that that extra let’s say you have to put down 20 but you want to put down 30 that that extra 10 percent is something of value that could go out in the marketplace and do other things. Our desire is that we want to put it down so that it reduces our mortgage payment but it would be so much more efficient and put our family in a stronger position if we only put the minimum down the 10 or 20 percent that’s required and any other cash that we have available we put in a fairly liquid investment something like cash value of life insurance or maybe one of our newer merchant capital accounts that we have available that keep the

[03:41] money liquid within say under a year but still earn pretty decent rates of a lot better than a bank CD and then that money can be used for us because if we put it extra against the down payment of our home all we’re really doing is helping the bank have less risk in the deal does that make sense absolutely it removes any kind of control and we can’t access that capital so we’re stuck absolutely and as you know controls one of the seven principles of prosperity that we talk about all the time and then one of the other ones is flow and it’s designed as a reminder that we always want to be thinking about cash flow so that really brings me to the second mistake that people make and that is a desire to have a 15-year mortgage instead of a

[04:33] 30-year mortgage and there’s all kinds of advertising right now about how much more effective it is to have a 15-year mortgage quicken as an example all kinds of advertising about 15-year mortgage and they say something in it that is correct and that is that you all pay less interest but what they don’t say is that you won’t have less cost and it’s very confusing sometimes to separate out interest from cost but when I started this statement I said that the ads are that the 15-year will be more effective and that’s not actually correct and it’s because they’re forgetting this fact of cost and it relates to the first mistake so the first mistake is people forget that their own cash has value well essentially if you’re paying a

[05:34] you’re paying in more money in a shorter time frame and so you run into the same issue you’ve kind of forgotten that your own cash has value in economics we learned and this is true in every high school and sometimes college economics class we learned something about opportunity costs and that’s essentially what we’re talking about right here yet we don’t ever get bring that little bit of an esoteric concept down to our own personal lives and this is what we teach and it’s one of the principles of prosperity in addition to control and flow and that’s measuring and you want to be able to measure your opportunity cost so that you can reduce it in every and because extra payments on a loan which is essentially all a 15-year

[06:32] mortgage is is making extra payments are going against the debt then their control is back on the side of the bank and not in your hands so we’re circling back to that same issue in again you’ve got less cash flow because your payments are higher you have less control because you’re building up something called home equity which is not in your control it’s controlled by the banks and then you have greater opportunity costs because of the way that you’re handling your interest payments and the interest payments are the only part of the loan that’s deductible and so I might even separate this out as a third mistake that people make sometimes especially right now at the beginning of 2018 the Trump tax bill I

[07:22] guess we could call it has reduced the deductibility of interest on a mortgage where the maximum mortgage used to be a million whereby you could deduct interest now it’s 750,000 but unfortunately what happens in the press is they’ll just say things like you’ve reduced or even I’ve seen the word lost your interest deduction and that’s not accurate and so like so many things we have to dig a little bit deeper but the point that I was making is that if you are speeding up your interest then you’re losing your deductions and that’s really what a 15-year mortgage does is it loses the deduction and so we could say well maybe that’s not as important anymore but it is and even if it wasn’t so even if at some point they took the interest

[08:15] deductions away it would still be more efficient more effective to do a 30 year mortgage because of the control and because of not building up an asset called home equity you really want to keep that asset in cash on your side of the balance sheet instead of at the banks how’s that for making sense so far that makes a whole lot of sense and this especially from a financial perspective because there’s in my opinion there’s two sides of buying a house you have the analytical financial side which when you have real numbers they’re not going to lie to you but then you have the emotional side of buying a house which for the most part that’s nothing to do with how the numbers play out it’s just how you feel of deciding when you

[09:09] want to buy or where you want to buy or what you want to buy yes and I think it’s really smart to separate those out because you want to do things like get pre-approved for a mortgage so that when you go start to look at houses and have all that emotional stuff come into play you have a dollar figure that you are set on and can share with the realtor and keep in mind when you’re looking on the web etc so that you don’t end up looking at homes that are really more than what your family can handle and getting emotionally attached to it when then you have to come back around and potentially either get on a house that’s a little bit over your head or say no and that’s tough to do emotionally when we are human beings and that drives

[10:00] our decisions many many times way more than the financial it does now maybe we just take a moment and talk about some of the emotional pieces so you mentioned getting pre-approved and I think that’s critically important and I wrote down a couple of notes and just from my background having been in real estate for a number of years I owned a brokerage and I’ve owned a lot of property one of the things that I wrote down as a mistake to avoid is buying from scarcity or a scarcity mindset so often I’ll hear people wanting to buy because they see that the prices are going up or they see that appreciation and they want to either not get priced out of the marketplace where they want to latch on to some of that appreciation I think if

[10:50] that’s a core reason for buying should be a almost a red light say stop don’t do this think about this logically absolutely Dolph de Roos who is a very well-known real estate investment buyer and author has a great saying and it is that the deal of a decade comes along once a week so maybe not quite so often if you’re looking at buying a you know primary residence as opposed to investment real estate but it is a telling story of how we can often operate from scarcity and it’s why the first principle of prosperity is to think from a prosperous mindset and that’s not always easy and sometimes we have to sort of force our prosperous hat on if you will as we’re going about making decisions and I find

[11:45] this true for myself all the time when I’m making decisions about home buying or any other thing am I thinking from a prosperous mindset or am I thinking from scarcity and it truly can be a mental switch that you flip so that you don’t get caught in scarcity mode and making decisions from that so can I want to ask what was the difference between the first house you bought versus the last house you bought well a lot of difference in what way are you asking about the differences so with the first house you bought did you feel like maybe you stretched yourself to try and buy a bigger or nicer house or take on a bigger mortgage on the first versus the last saying you know what I’m a little bit more of a prosperous mindset and it’s something

[12:40] you’re gonna be in long-term was there any difference of those two well it’s funny thanks for clarifying the first house now is just a basic starter house fine by it in fact another mistake that is so often made and and I think you can get around this mistake okay we certainly did is buying fixer-upper when you don’t have skills with the fixer-upper ability like hammers and nails and saws and such things so we often fixed things in a way that really wasn’t correct and it showed but you know as a first starter house so didn’t matter our second house we really stretched and it ended up being fine because the appreciation in that area was pretty solid and consistent and so it worked out okay but it was something you know

[13:34] looking back on it hmm hard to know whether that was a good decision or not I mean obviously it turned out fine but would I do it again mmm that’s a toughie I have to admit in some cases I might and maybe that’s that abundant thinking going on and the house that we’re in right now which we built has a whole lot of emotional attachment to it because it’s on fourth-generation property and so we made some decisions around this property that we knew we were going to be in for a very long time differently than I would make in a typical home environment especially one that would be in a community because we’re in the country so we were not really in a community and I absolutely do not regret those decisions at all ever even

[14:26] though financially they may not have always been the best so I think that’s a really great example of those ancillary issues that you make sometimes because it’s best for the family it’s best for the business even in this case because we built bigger than we need and that enables us to have our office in our home and the additional things that we made decisions on I’m so grateful for because especially when you are building you don’t really have sometimes a second chance in other words you know the foundation is what the foundation is not that you can’t sometimes change that but just a little funny story for example we built a really big driveway that’s a piece of cake to turn around in and I’m so

[15:09] grateful because this house ends up being Grand Central sometimes there are so many cars here it’s crazy and if we hadn’t built that big driveway it would be a constant pain because people would be in the yard in the mud you know who knows where and so that’s an example sometimes I think of you do what’s right for the situation sometimes even the literal property the family you know the environment as a whole and not always what’s financially the best thing to do that is a wonderful example so I think for our listeners is as we begin to wrap up yeah you have to separate the house buying into two categories you’ve got the financial and then you have the emotional and if I can summarize some of the mistakes which is

[15:52] forgetting the cash that your own cash actually has value and people forget that by putting in too much for that down payment losing that cash value ability the second is to desire of having the 15-year mortgage and that’s really comes down to misjudging the opportunity cost and the third is about losing the deductions is that pretty good summary it is and if people are curious about seeing the numbers on the discussion between the 15 and the 30-year mortgage our book busting the interest rate lies goes through it in detail with truth concepts calculators and a very heavy hand on all of the analytics proving the theory out that the 30-year mortgage is the most efficient the most effective way with the least cost to purchase a home

[16:53] so again that’s busting the interest rate lies and of course there’s an audio version of that book and if by chance you’ve bought the audio and kind of wish you could see some of those calculators if you’ll email me I will be happy to send you just the home mortgage calculator so that you can see them of course if you are actually going to buy the book I would just recommend getting the either physical or Kindle version it shows just fine on Kindle where you can actually see the calculators but if if you just have audio let me know and I’m happy to email those calculators to you so that you can really see it and get in and I will admit that it took me a long time with this issue to understand it thoroughly and and

[17:36] really buy into it because I used to want to prepay my mortgages too and so after going over it with Todd’s help and the truth concepts calculators many many many times I finally got my mind switched over which then helped me get the emotional side switched over as well it’s pretty tough to argue when it’s proved left right and central and upwards and downwards backwards forwards etc and that’s how it’s done in that busting the interest rate Well thank you Kim and for our listeners you can send that email to hello at partnersforprosperity.com I’ve looked at the truth concepts calculator and I’m just saying from me as an investor having owned a lot of property it completely changed the way that I look at it so if that is something that’s

[18:23] on your horizon of buying a house or an investment property definitely take a look at busting the interest rate wise and send an email to Kim hello at partnersforprosperity.com Thank you for listening to the Prosperity podcast to take control of your money and have it work for you visit us at partnersforprosperity.com If you liked this episode make sure you subscribe and leave a review