When there are changes in the housing market, everyone seems to be talking about buying or selling houses. If you’ve thought about buying a house, it’s important to do the right research, because this is one of the biggest financial decisions you will make. A house is the place where you and your family will spend countless hours together making memories. The kitchen is a central gathering place, and a backyard is a special place for playing together as a family. There are many options to consider when you want to own: buying, building, rent-to-own, and more.
But a house can also be the source of extreme financial stress if you’re not ready to buy or build a home. To help you figure out how to buy a house, we’ve prepared this guide that will discuss the financial steps on how to buy a house and answer some of your questions about financing a home.
Here’s what we’ll cover in this piece:
One of the most important things to focus on when buying a house is how to finance it. Here are some of the most common ways to finance a house.
Loans may seem like one homogeneous category, but there are several types of loans that you can use to finance your house. Here are the details on different types of loans:
Types of Mortgage Terms
There are many options available for mortgage lengths with custom terms and rates, but these are the most common options offered by lenders.
Here are some of the advantages and disadvantages of each term length:
Qualifying for a Mortgage
When you apply for any of the above types of loans, they fall into two categories: qualifying and non-qualifying. Qualified loans meet the requirements of the Consumer Financial Protection Bureau, and non-qualified loans do not. These requirements ensure that lenders are offering fair terms. Non-qualified loans require extra research before signing.
Once you’ve determined the loan you would like, you need to make sure that you qualify for it. You will most likely need to show that you have the following:
Should You Pay Off Your Mortgage Early?
When you’re considering buying a home, you will get a lot of advice, and the most common may be to pay off your mortgage early, so you can own your house. It seems to be part of the American dream to pay off your mortgage. But is it actually in your best interest to pay off your mortgage? It can be in some cases, but more often, it’s better not to pay off your mortgage, and here’s why.
When you’re making extra mortgage payments, you are essentially parking your money in a non-liquid asset that you’re not able to access. You will have less capital to use for everything from emergencies to family vacations when your money is tied up in mortgage payments. More importantly, you will have less money that you’re able to keep or invest until you pay off your mortgage. With investments, you’ll want a return earlier on instead of waiting for fifteen years until a mortgage is paid off. If you start only after your house is paid off, then you won’t be gaining as much to use or save for retirement.
An alternative to paying off your mortgage early is buying whole life insurance. If you continue making your regular mortgage payments, you can have extra money to put in life insurance, instead of making extra payments. Your life insurance policies can then accumulate cash value for the duration of your mortgage and beyond, leaving you with more cash value you can use now. Then when you do finish paying off your mortgage, you already have capital saved up that can be used to save for retirement and to leave a financial legacy. But it’s crucial to start your money growing early on, which may not be possible if you focus on paying off your mortgage. To see how this process works, this video illustrates how much money you can accumulate by not paying your mortgage off early.
The Infinite Banking Concept
A down payment, interest rates, and mortgage payments all begin to add up. Because of all these payments, you can often end up owing the bank a lot of money and paying them a lot of interest. But there is a way to ease the financial burden with whole life insurance. This is called the infinite banking principle.
When using the infinite banking principle, you work on accumulating a high cash value in your whole life insurance policy. This capital is like equity in the death benefit and can be used when you are still alive. It can also be used to help finance your house. Instead of borrowing from a bank and paying interest to the bank, you could use the cash value in your life insurance policy. Essentially, you are then paying interest to yourself. That’s why it’s called the infinite banking principle: you are using your own insurance policy to help pay for your house.
In addition, the cash value from a whole life insurance policy can also be used to help fund some of those payments, like the down payment. These policies, once funded, will help you accumulate wealth that you can use today and in the future.
Self-financing your entire mortgage using the infinite banking principle, can give you more flexibility, but may not be the best financial decision.
In the current environment with low interest rates it usually makes the most sense to finance your house with a bank loan, and make “extra” discretionary payments to build a whole life insurance policy while you pay off your mortgage as described in the previous section.
If building or rent-to-own aren’t what you want, you may decide to buy an existing house. If you’ve decided to buy a house, these are the basic steps to go about buying a house.
There are a lot of factors that can go into whether or not building or buying is better for your individual situation. The first thing to consider is the housing market. That can cause differences in what is currently available in the area you want to live, and the housing market can also determine if it’s better to build. But you may be wondering, “Can it be cheaper than buying a house?”
While it’s fairly simple to find out how much an existing house costs, how much does it cost to build a house? Again, the answer can vary depending on who you ask and what type of home you are trying to build, where you’re building, and the current housing market. On average, building a home can cost between $147,000 to $436,000. So building a house could be more expensive or more affordable than buying an existing house, but it can depend on where you live and what you want to do.
One of the best ways to determine the approximate cost is to consider that the average cost per square foot is about $103 and then to multiply that by the amount of square footage you would like. The cost will vary by where you live, and based on the current housing market as well.
To finance building a house, you can also get a loan. But the process of getting a loan to build is slightly different than for buying a house. Instead of getting a typical mortgage loan, you will get a construction loan. Keep in mind that a construction loan is considered higher risk because the house doesn’t exist yet, so your credit score will be much more important when getting approved for this type of loan.
To get the loan, you’ll have to provide a lot of information on your construction plan including floor plans, materials needed, and even the type of insulation that will be used. You may also need to pay approximately 20% for the down payment on a construction loan, but it could end up being even higher.
A construction loan typically only lasts a year, and after that, you can pay off the entirety of the construction loan, or you can turn your construction loan into a regular mortgage loan.
There are so many options for owning your own home, even with variations in the housing market. You can buy—following the above steps—or you can build. All of these options have their own benefits and drawbacks. Each one works for different people and different situations.
Don’t hesitate to find financial advice to determine which options will be best for you. Here at Life Benefits, we can help you recover the money you pay on your mortgage interest by building wealth in whole life insurance rather than making extra mortgage payments. Whether you are currently in the housing market, or looking to build, you can use this strategy to start building your wealth at the same time.