Let’s look at two elements of common wisdom that many buyers follow when purchasing a home. One element advises them to eliminate certain houses from consideration. The other, tells them how much to spend. We consider both these elements of common wisdom to be myths!
Myth 1: Never buy the most expensive house in the neighborhood.
You’ve probably heard this one at least a few times. It’s been around forever. The idea is that you will have trouble when you ultimately go to sell if you buy the most expensive house in the neighborhood.
The kernel of truth in Myth 1
Example: The neighborhood is full of 3 -4 bedroom homes with 2-car garages on ½ to ¾ acre lots. But, there is one house – the most expensive one in the neighborhood – that is on a 5 acre lot, has 10 bedrooms and a 5 car garage. It’s a veritable mansion surrounded by modest homes. Yes, it is going to be very difficult to sell. But the problem isn’t so much that it’s the most expensive home, rather that it’s an outlier. It is out of place in the neighborhood. Someone who wants a mansion, wants to be in a neighborhood of mansions.It’s a good idea not to buy that house.
Every single neighborhood has a most expensive house, and they are not all taking hits when they get sold. As long as you are not an outlier, but are on the continuum of prices, sizes, and features with other houses in the neighborhood, your house will be just as salable as the next house.
Myth 2: Always buy a house for the maximum amount your bank qualifies you for.
The idea is that you should take full advantage of the opportunity to borrow money for your biggest investment.
The kernel of truth in Myth 2
When your grandparents went to buy their first home, the banks were very restrictive about the size of the mortgage loan they would approve. It was not unusual for the banks to limit a person to a loan with a payment that was much lower than the rent they had been paying for years. And, obviously, they could afford that rent…they had been paying it. The banks were going through a very conservative period, and it made a lot of sense for everyone to borrow whatever they could. Especially since buyers frequently had to make big compromises on housing even when they did borrow the max.
In recent years banks have been less restrictive. In fact, they have gone through periods of approving loans with payments that were dangerously high for the borrower. The rash of foreclosures in the 1980’s and 90’s is a clear indication that banks were lending more than borrowers could safely handle. It makes sense for you to create a budget and figure out how much you should spend on housing each month. Then, target a purchase price that will have mortgage payments that don’t exceed your budget. You can no longer rely on the bank to limit you to a safe level. You need to do that for yourself!
For more advice on these and other elements of common wisdom, call Chris Kostopoulos at 857-829-0282 or email him at Chris@Isellmass.com