One of the bigger headlines for millennials in the past couple of years has been their lack of accumulating assets, including purchasing a household. With the collapse of the global economy, the mounting student loan debt and a lackluster labor market, a significant number of millennials have been relegated to their parents’ basements and have been unable to transition into adulthood.
Across most Western countries, the home ownership rate for the ever important under-30 age group has been quite low. In the United States, for instance, the home ownership rate for those between 18 and 35 has dipped from nearly 18 percent to just over 13 percent.
Rising home prices and increasing mortgage rates have been some of the major factors for this several-year decline. CNBC even ran a headline this past summer entitled "Millennials are dragging down the homeownership," which suggested that millennials today are hurting the real estate market and the overall economy.
"The millennial generation will have enormous influence in coming years, especially as they hold off on getting married and having children, the two biggest reasons for first-time home purchases," said Zillow chief economist Stan Humphries in an interview with the business news outlet. "A lower homeownership rate because of these demographic shifts will have a ripple effect, keeping rents high and potentially impacting the broader economy if substantially fewer people pay property taxes and buy fewer home goods."
Since home values have soared since the end of the Great Recession - thanks in part to the artificially low interest rates and quantitative easing - can anyone really blame millennials from entering this market? Let’s face it: most living quarters in New York, Beijing, Toronto and London are vastly overvalued, something that a lot of financial institutions have concurred in recent years.
However, for those millennials who have the money, family and career to purchase a home, there are some things to know when applying for a mortgage and seeking out a home. There’s no shame in not understanding the process (remember, it’s imperative to speak with your local financial advisor and mortgage specialist).
With that being said, here are seven common mistakes that millennials will often make when buying a home for the first time:
1. Down Payment
Each country or state/province has its own down payment options. The most common down payment for a house or a condominium is between five and 20 percent of the mortgage. In the U.S., it was announced that the Federal Housing Agency (FHA) would reduce its minimum down payment to three percent in order to spur growth and encourage people to buy a house. You must calculate how much money you have available and if you are able to place a down payment without seriously affecting your personal finances.
Remember, the higher the down payment the less overall interest costs you’ll have to pay in the future. Also, giving a down payment allows you to have skin in the game.
2. Interest Rate vs. Mortgage
What’s more important to you, the interest rate or the overall size of the mortgage? This is what you’ll have to discuss with your nearby financial institution. Generally, there are two types of interest rates: a fixed-rate mortgage and a variable rate mortgage. The former locks in an interest rate for the term of your mortgage, while the ladder changes your interest rates (when rates go down a greater amount of your payment goes towards the mortgage; when the rates go up a greater amount of your payment goes towards the interest.)
3. A Reality Check
If you receive a 20-year, $150,000 mortgage and your monthly mortgage payment is $1,090 (as an example), can you really afford this? Sometimes, many people underestimate or overestimate their personal finances and how much they can really afford for a mortgage. There are various tools offered by banks on the Internet to determine what the maximum mortgage payment amount you can pay off every month is. You must always have six months worth of finances available in case of an emergency.
4. Mortgage Pre-Approval
Most banks today offer a pre-approved mortgage. This allows you to search for a home with confidence and in your price range without worrying if you’ll have a mortgage or not. You should take advantage of this when you’re in the market to buy a home.
5. Credit Rating
What’s your credit rating? If you don’t know the answer to that question right away then you may not be able to receive a mortgage. A good credit rating enhances your chances to receive a great mortgage, while a lower one has the opposite effect. Millennials have to ensure they’re paying their bills on time and do not have any outstanding debts if they wish to attain a mortgage.
6. Housing Costs
It’s not just millennials that don’t often realize that there are a wide variety of costs associated with acquiring a home. In fact, it’s more than just securing a $400,00 mortgage and then buying a house. Some of the related mortgage and housing costs include lawyers, taxes, property taxes, home inspections, insurance, variable monthly costs and so on. These have to be factored into your home buying prospects.
7. Long-term vs. Get Rich Quick
One of the reasons for the housing collapse was the individuals who wanted to get rich quick and decided to purchase a dilapidated property and then remodel it, otherwise known as flipping. This is a high-risk venture and should likely be avoided if you’re not a seasoned renovator. With that being said, when you seek out a mortgage, you should determine if buying this home is a long-term prospect that you’ll live in for the rest of your life, or just a temporary housing solution.
It’s true when the industry says buying a home is the biggest investment you’ll make in your life. You have to look at everything involved with both attaining a mortgage and maintaining a home. There are a lot of unexpected costs when having a house or a condominium, so be prepared.