The #1 mistake homebuyers make

Homeownership is part of the American Dream; it’s the biggest purchase most people make in their lifetime and it can be a great wealth-building tool.

Unfortunately, like any tool, home ownership can harm you if misused. Here’s the biggest mistake homeowners make and how to avoid making them.

Image source: Getty Images.

People move too often

Owning a home can be a financial advantage; Houses have historically appreciated in value over time and helped build wealth. Ownership is also emotionally rewarding for many; Your home is yours, which means you can paint the walls or rip the carpets as you see fit.

However, moving too often can hurt your finances. real estate company redfin says the average US home is sold every 13 years.

Life happens, and moving can make sense if you’re moving for a lucrative job, but people often move for other reasons. The National Association of Realtors conducted a survey that revealed the top three reasons people sell their homes:

  • Get closer to friends or family
  • Need a bigger home
  • The neighborhood is decaying

Moving is not the end of the world; people always do. But most don’t realize how much it can cost you if you do it too often.

That plays into the hands of the bank

A 30-year mortgage is the overwhelmingly popular home equity payment method that banks have love. A mortgage has a payment structure of 360 monthly payments; You own the house right after that last payment.

Unknown to most, banks preload their profits on the loan, known as your mortgage interest. Payments in your early mortgage years are used primarily for interest, with little money going towards the principal of the loan.

For example, the monthly payment for a $200,000 30-year mortgage at a 5% interest rate would be $1,073.64. On that first payment, $833.33 is interest, and only $240.31 goes to that $200,000 principal balance. The scales slowly tip each month, and the tide eventually turns; Your monthly payments at the end of your 30-year journey will be almost entirely principal and little interest.

Remember the average homeowner only stays 13 years? After that period, the monthly payment would still be $613.94 in interest versus $459.70 in principal. That means you paid the bank more than you paid for your house in over a decade.

People who move often spend a lot of time lining the banks’ pockets on interest payments and receive minimal home equity in hopes that the market will be hot enough to raise home values ​​to make up for it. Staying in place long enough to sensibly repay your capital is the secret to getting the most out of home ownership.

How to win the game

I’m not trying to tell you that you can never move; Life happens again. The best thing you can do is try to think long-term before buying a home. do you want children Maybe you should consider that before buying a bachelor pad. Of course, you can also pay a surcharge on your mortgage by putting money on top of the principal once you’ve covered your monthly payment.

There is nothing wrong with renting if you need mobility or are unsure where you want to live in the long term. With a little planning and thought, home ownership can be a dream come true. Just make sure you’re playing the game to your advantage, not the bank’s.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in Redfin and recommends Redfin. The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.

About Paige McCarthy

Check Also

Equity MF vs. REIT: Know the basics of small investments in real estate

Just as mutual funds (MFs) allow you to invest in small amounts to acquire the …