When financing a property, avoid these common mistakes
Once you’ve made the decision that you’re ready to buy a property, and you’ve assessed how much you think you can afford, you may have already started looking at the market, or even fallen in love with your potential new home. But there are still several important steps you need to be aware of before you’re ready to buy. Financing your new home is one of the most important financial commitments you will make in your life, and you need to be very careful how you go about it. Here are some of the most important real estate financing mistakes that you should avoid:
Going for the ‘lowest rate’
While you’re shopping around for a lender to mortgage your new home, it’s easy to get distracted by appealingly low interest rates. However, a low rate does not necessarily mean saving money in the long run. Be sure to read the fine print carefully: what strings might be attached to the loan? Are there hidden fees, or ongoing costs that the lender didn’t advertise along with the low rate? For example, if you think you will be able to pay off more of the loan sooner than the mortgage is for (i.e., if you can pay it off in 5 years instead of 10), sometimes there are fees you must pay for paying off early. Same thing if you want to pay more off one year than the next. You should also consider the flexibility offered by the rate—-if you are an investor, flexible financing is an important factor to consider if you’re hoping to expand your property portfolio in the future. Instead of focusing on just the rate, be sure to consider all factors in order to plan a sound strategy when financing a property.
Fixing your loan
If interest rates are on the rise, many are tempted to fix their loan in order to avoid increasing their monthly payment. However, if you do the math, you may find that a fixed loan will end up costing you more in the long run. A variable loan may increase as prices rise—-but it could also decrease over time. Moreover, there are usually high exit fees you’ll have to pay if you choose to refinance or end your loan contract before the end of the fixed rate period. That being said, it’s all aboutrisk assessment. If you’re the type who prefers stability, and you want to know exactly how much you will be paying month to month, then a fixed rate loan could be the best option for you. A fixed rate ensures that you will know for a fact that you will be able to manage your monthly mortgage. It’s important to assess what matters most to you when financing a property—-stability, or something a little more risky that could pay off in the long run.
Not assessing the total cost of property ownership
It’s not just the down payment that you will have to fork over at the time of purchase. There are many extra fees you may not be aware of, such as notary costs, taxes, and commission (which EverEstate does not charge on many properties). This can add up to over 10% of the purchase price—-a pretty penny, not to be underestimated when considering property financing options. Many lenders will not cover these costs. Use a financing calculator to estimate your buying costs and your monthly repayments in order to get a more accurate assessment of what how much you will actually be paying. Don't forget to include HoA fees in your monthly expenditure--when you buy a property, you will be expected to contribute to the overall maintenance costs of the building every month, which can range to a few hundred euros a month, depending on the size of your property.
Not calculating past, present, and future property expenses
Before committing to a property to purchase, you need to assess exactly how much you will need to finance it. That means you need accurate records of past expenses involving the property, including utilities, taxes, and especially repairs. Find out what reparations were made, when they were made, and whether any warranties exist in order to avoid additional costs. This information will give you a clearer idea of when reparations might be needed again, so that you can include this cost in your financing assessment. If you are purchasing a rented property, you need to calculate all expenses related to the property and renting it out: in essence, you are acquiring a rental business, and you will need to be able to financially maintain every aspect of this business.
This may sound like an overwhelming amount of information to consider, but real estate financing is nothing to be taken lightly. Financing a property is a complicated business, and should be taken with careful consideration and a comprehensive understanding. When done smartly, it can lead to large capital gains and can offer long-term financial stability. To learn more about buying a home in Germany, take a look at our guide for expats, and to learn more about German financing terms, read our glossary.
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