Buying a New Home – The Mortgage Approval – Part II
The bank’s best personal financial advice was to offer the Trouts a cool million dollars in potential financing. Thankfully, our couple didn’t take all of the bait… but they certainly took some. Let’s remember, they have no personal budget, don’t know how to budget, nor have any idea how to keep personal finance books for their household. Like I said… a bank’s dream client!
The home they purchased was $650k. Let’s see how all the numbers crunch:
Purchase price + land transfer tax + home inspection + legal costs for title search and all disbursements:
$650,000 + $9,750 + $650 + $1,260 = $661,660 minus $100,000 down payment = $561,660 mortgage
Did you notice that almost $12K or 12% of their down payment got eaten up by the purchasing transaction alone?
The bank, disappointed that Trout-CO took only half the bait, offers up more financial help and advices they setup a line of credit secured against the equity of the home for the balance of the original million dollar approval for “renovations” or “sundry” purchases that come up. Good thinking bank! Trout-CO currently lives in a two bedroom apartment… they’ll need pool supplies and a lawn mower and a weed whacker and some rakes and shovels and gardening gloves and a BBQ and and and….
When you’re purchasing a new home, the best financial advice you can get is to create a personal budget for all the sundries up front. Include for everything it takes to setup your home right into your overall house budget because if you don’t, your Clothing/House cost centre will get ravaged. There’s nothing like finding a great pad you can’t get full enjoyment out of because you only end up using 20% of the living space: lots of homebuyers have literally nothing left over to buy furniture with. Why? Because the best personal financial management information they got came from the Bank!
Being house poor is such a paradox: investing most of your money to increase your standard of living when in affect you’re decreasing it. What is the point of purchasing a beautiful 4,500 home if you can only furnish 2 rooms? Or having a fabulous backyard if there isn’t enough money to buy a patio set or a BBQ? How many times are you going to use the pool if you can’t afford to heat it? These are all things to take into consideration when setting up your personal budget, your personal finance books and calculating Total Cost of Ownership (TCO). Remember financing something that has zero ROI (like the patio furniture, BBQ or rakes) is a big no no even though the wily bank is pushing you to do so.