Buying a home is an emotional process and probably the biggest financial decision many people will ever make, and there is, therefore, a lot of pressure to get it right. You don’t want to overpay, make any legal mistakes, or buy a place you grow to hate within a short time or will fall into pieces in a few years. Most importantly, you don’t want to become another statistic of Kenyans who have experienced the worst nightmare one could possibly face – your house standing on stolen land like a road reserve, or next to a security installation and therefore being pulled down. You have seen the heart-rending wailing and tears on TV.
It is important to take emotions out of the process of buying a house as you could end up making a lot of mistakes. You should not buy a home because “others” are doing so. If you decide to buy, do it for the right reasons – because it fits within your goals, you can afford it and you want to become a homeowner. Don’t do it because you think it is a good investment. A mortgage is an expense from your monthly income and you had better be sure you can maintain it. Home ownership is a lifestyle and you must only adopt this lifestyle if you can afford it. It comes with many other expenses – insurance, security, mortgage payment, maintenance and so on.
The first thing to do once you decide to buy a home is to figure out how much you can afford to pay for it every month including mortgage, maintenance and other expenses. This should not be much more than what you are currently paying in rent, unless you expect your income to rise sharply in the coming years. You must take certain risks into consideration when buying a home on a mortgage – what if you lose your job or your income reduces for other reasons?
What if the interest rates are hiked to levels you can no longer afford? It’s happening right now after the Central Bank recently increased the base- rending rate to 18 percent. Ultimately buying a home boils down to what you can comfortably afford to pay without defaulting or developing ulcers.
Once you have found a home you can afford, calculate how much down payment you will be able to make and how much you need to borrow. There are many factors to consider when shopping for a mortgage. Ensure you get a good fixed rate. You should realise that even a small change in interest can make an enormous difference to the monthly mortgage payment and in the total cost of the loan. Find out what kind of fees the lender charges and how much the legal fees will be. These charges can be major and you therefore need to negotiate.
Your goal is to find the lowest total cost for your loan. In most cases this means focusing on the best interest rates, and lower closing fees. Once you find a lender, ask lots of questions – are the interest rates locked? How is the interest rate calculated – on reducing balances or yearly? How much time do you have to close the deal? Are there penalties if you pay the mortgage early? Remember, once you sign the deal, you will not have room to renegotiate. A mortgage will have a big impact on your budget so take time to do things right. In addition to getting the best interest rates you can do certain things to reduce your monthly repayments:
Buying a cheaper house. The lower the purchase price, the lower the mortgage. For this reason you need to set a budget before you start shopping for a house.
Making a bigger down payment. The less you finance, the less you pay each month. It makes sense to save for a sizeable down payment to reduce the amount you will borrow.
Getting an interest free loan. Your employer could advance you some money or you could borrow from your rich uncle. Interest rates have a huge impact on your monthly payments, so shop until you find one that fits your pocket.