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SAVING AND INVESTING

If you earn more money than you spend, you can save the overage. Why would you want to do that? Because the future is uncertain, and you might incur an unexpected expense for which it would be helpful to have savings. Alternately, if you plan to retire or make a large purchase, you would need savings to live off of or to use as a down payment. The alternative would be to borrow against your future earnings until you can’t borrow anymore. Eventually, lenders will stop lending money to you, and you will have to spend all your time working to get out of debt—or declare bankruptcy. Then it would be even harder to borrow money. Most people agree that the best course of action is to save some money for a rainy day, a major purchase, or retirement.

SAVING AND INVESTING WITHOUT INFLATION

If your savings can be employed productively (to earn more money), then, in the long run, you can retire on the interest, dividends, or rent (passive income) you earn from your savings. Traditionally, people would put their money in the bank or buy bonds to earn interest, buy stock in a business (either a publicly traded corporation or a privately owned business) to earn dividends, or invest in real estate to earn rental income. This approach worked as long as there was minimal inflation. You could count on your money maintaining its purchasing power through your retirement years. Whole life insurance was also a viable way to save money for the long term, as were other insurance policies when inflation was low.

SAVING AND INVESTING WITH PRICE INFLATION

Unfortunately, there’s a problem with this approach in 2025/26: inflation. Inflation is the expansion of the money supply by those who control it—primarily the Federal Reserve Bank of the United States. Jerome Powell, the Chairman, is frequently in the news. See How Inflation Plays Out for the consequences of inflation.

The primary consequence of inflation is rising prices, making goods more expensive. Some people confuse rising prices with inflation itself, so we’ll call it "price inflation" to distinguish it. When price inflation occurs, any savings kept in the inflated currency will lose purchasing power. For example, if you save $1,000 in year 1, and year 2 has price inflation of 5%, at the end of year 2, you will only be able to purchase $950 worth of goods with that money. In 2021, the U.S. inflation rate was 7%. In 2022, it was 6.5%. See U.S. Inflation Calculator.

Your purchasing power is dropping fast. Since 1914, when the Federal Reserve Bank (the Fed) was put in charge of managing the U.S. dollar’s value, the dollar has lost 97% of its value. See Inflation Calculator. In other words, it takes 100 of today’s dollars to purchase what $3 could buy in 1914. You might think the Fed hasn’t done a very good job of maintaining the dollar’s value since 1914—and you’d be right. At the current rate, one might wonder how much longer the U.S. dollar will be able to purchase anything.

In the long run, high inflation rates make it difficult to plan for long-term projects. That means multi-year construction projects, building factories, manufacturing large equipment, even long-term insurance policies that will be paid in inflated currency units won’t buy as much in the future as they do now. Will your insurance policy cover your funeral expenses when you die?

Hedges Against Price Inflation

To protect oneself from the gradual erosion of the Dollar’s purchasing power, people have traditionally purchased gold and silver. Many people recognize that gold and silver are “real” money and that the paper (fiat) money that is commonly used today is merely a substitute (and a poor one at that). Thus, many central banks around the world are buying these precious metals as fast as they can. At the same time, they are using the paper futures markets to manipulate metals prices; i.e., keeping their prices artificially low by selling short and driving their prices down. At some point, this manipulation will fail and prices will over-react to the upside. In the meantime, gold and silver are being kept low through market intervention by the central banks of the world.

Real Estate

Today, some people also purchase real estate as a hedge against inflation. Real estate comes in different categories:

  • Commercial Real Estate - generally means real estate with buildings that are rented out to or owned by businesses that sell something to consumers.

  • Residential Property - includes rental properties or property owned by homeowners.

  • Raw or cultivated land - used for mining or farming, extracting raw materials for building things, or growing food. Growing food is a good business to be in during inflationary times since food prices go up as the money declines in value.

  • Timber - also favorite hedges against price inflation.

Collectibles
  • Baseball Cards

  • Comic Books

Most tangible items go up in value during inflationary times (assuming their prices aren’t manipulated or regulated by some government). They all seem to do a better job of maintaining their value than the U.S. Dollar does. (Other paper currencies are also losing their purchasing power, so you probably won’t gain anything by buying a foreign currency in the long run, unless they decide to back their currency with a hard asset like gold.)

In the past, when governments lose control of their spending and they print money to infinity, people start to hoard physical items that tend to retain their value. The same governments that cause the inflation then outlaw hoarding. In fact, they may even confiscate items from hoarders and distribute them to people who don’t have anything. It’s not long after that that society breaks down and chaos ensues. Shortly after that, a strong man like Napoleon or Hitler takes over and restores order.

Cryptocurrency

Today, there’s a new kid on the block…cryptocurrencies. The most popular and noteworthy cryptocurrency is called Bitcoin (BTC or XBT). Bitcoin uses a public decentralized ledger known as a blockchain and is thought of as a digital currency. It was invented in 2008 by someone known as Satoshi Nakamoto. Thus the smallest unit purchasable is called a satoshi. Because it has a set limited quantity, it will not be inflated very much. This assures that the price can only go up in the long run, relative to the fiat currencies of the world.

While a number of countries have banned bitcoin, and still others have implicitly banned it, many have not, including the United States. El Salvador has granted bitcoin legal tender status and Ukraine accepts bitcoin donations to fund its fight against Russia.

It’s worth noting that some people have objected to bitcoin on the grounds that its proof-of-work algorithm for mining requires the consumption of a growing quantity of electricity and they believe that this contributes to climate change although they haven’t objected to the use of electrical vehicles (EVs) and their ever-growing use of electricity. The bottom line is that bitcoin is potential competition for the fiat currencies of the world and so they are being bad-mouthed (and sometimes banned) by the establishment central banks and their dependent governments.

Buying a House

If you don’t mind maintaining a house and you plan to stay in your current location for some time, you might consider buying a house. Some landlords may even rent to you with an option to buy or a rent-to-own agreement. In my opinion, this is more likely to happen if you are renting a single-family house than if you are renting a multi-family house. For more information about these kinds of agreements, see https://www.investopedia.com/updates/rent-to-own-homes.

Many of my tenants save up their money and eventually move out into a home of their own. This was especially true when interest rates were low. With higher interest rates, the outflow has slowed. So, if you can choose a time to buy, you might try to do it when interest rates are relatively low, rather than high. On the other hand, the house you like might not be available any more if you wait for interest rates to decline, and prices may go up when interest rates go down. Alternately, perhaps you can re-finance the purchase later if rates drop. Your bank will undoubtedly have rules and restrictions on re-financing. Be sure you know what they are ahead of time.

Many people find that being pre-approved for a mortgage saves time in the long run. Getting pre-approved tells you how much of a house you can afford, what your interest rate and monthly payments might be, and what kind of mortgage you are qualified for. You won’t waste time looking at homes that are more expensive than you can afford. Also, if you plan to work with a realtor, he or she may require you to be pre-approved before beginning the search for your new home. You can become pre-approved by contacting most mortgage lenders via phone or their website. https://app.homebuyer.com/rates works with a number of different lenders and has a pre-approval app on their website.

Other folks prefer to find a house they like before approaching a lender. Perhaps they have money saved up or they have a wealthy relative who will help them obtain financing? Finding the right property could mean:

  • Driving around town looking for signs.
  • Looking online.
  • Calling a local real estate brokerage firm.

By driving around town, you may find a house that is for sale by the owner (FSBO) or one that is listed for sale with a local broker. The FSBOs are generally not listed online. If you look online, you may find properties that don’t have a sign out front. And by calling a real estate broker, you may find out about a property that will be available soon but hasn’t been advertised yet. So, all three methods have their good points and bad points.

If you are using a real estate broker/agent, he/she can be very helpful in guiding you through the process of buying a house. Not only can he/she:

  • Show you what is available on the market.
  • Pre-qualify you so you know what price range you can afford.
  • Present your offer to the seller.
  • Help you negotiate the terms of the purchase.
  • Help you find an inspector and/or a lender.

As with all agents/brokers, some are more helpful than others… and until you sign a listing agreement, you can switch from one that you don’t like to one that you do like. I should also mention that most brokers are working for the seller because that’s who is paying the commission. Even your broker will be paid by the seller when you buy a house unless you hire a broker to work for you as a buyer’s agent.

Home Inspection

Let’s assume you find a house you like. It’s probably a good idea to have the house inspected. You will have to pay for that. Ask your lender whether you need to choose an inspector from their approved list. If you hire a reputable inspector, he/she will check:

  • The roof.
  • Insulation.
  • Electrical system.
  • Plumbing system.
  • Drains.
  • Anything else that is readily visible.

I recently saw an inspector use a drone to take pictures of a roof. Shortly after completion, the inspector will write up a report and give it to you with his/her recommendations. If there are any major or minor problems with the house, you will have to make a choice:

  • Do you want to take the chance that the seller will correct the problems to your satisfaction?
  • Do you want to negotiate to subtract some money from the purchase price so you can correct the problems yourself?

If you don’t know anything about home improvement, you may want to find a handyman or two to give you a quote to correct the problems. If you opt to correct the problems yourself after closing, you may find more problems than you anticipated. It can be a tough choice to make. It is also possible that your lender will require the repairs to be done before closing.

Financing


Paying Cash

Unless you have a lot of cash lying around, you’ll need to finance the purchase. That means you’ll need to find someone who will lend you the money to purchase it. For the time being, let’s assume you are not a veteran, as there are many programs available to veterans that are not available to non-veterans. See Veteran Housing Programs for details.

On the outside chance that you have a wealthy relative who would lend you the money, you could see under what terms or conditions he/she would lend it. (I have had tenants who borrowed money from a rich relative to buy their first house.) Barring a wealthy relative, you may approach a bank. This is the more usual approach, in my experience. (Most purchase agreements provide that the agreement is contingent upon the buyer obtaining financing.)

Bank Requirements

What is a bank going to want from you? They will require financial statements, including:

  • An income statement.
  • A balance sheet showing your assets and income.

Banks prefer borrowers who can repay loans (and don’t like to own houses), so they typically require:

  • Liquid collateral (assets they can seize if you don’t repay them).
  • Cash flow (proof you can make monthly payments easily), which means a stable income source.

A job with a financially sound employer is usually preferable to self-employment, although professionals such as doctors, lawyers, engineers, and accountants may be exceptions. Banks also have preset financial ratios they use to assess borrowers. They will also specify:

  • The required down payment (normally at least 20%).
  • Any additional costs such as loan "points."

Then, based on the interest rate at the time and the loan duration, they will calculate your monthly payments and determine if you can afford them.

Appraisal

Next comes an appraisal, which you will have to pay for. The bank will hire a local appraiser—someone who supposedly knows the local real estate market and is licensed. Because appraisers are licensed, there is a limited supply of them, and so it may take a month or two to get the appraisal back. The appraisal is usually based on comparable properties in the area that have sold recently.

Based on the appraisal, the bank will decide how much money they are comfortable lending. For example:

  • If the appraiser values the house at $100,000, and you are offering $150,000, and the bank only lends 80% of the appraised value, they will only lend $80,000. You’ll need to come up with the remaining $70,000.
  • If the appraisal comes in at $200,000, the bank will be much more willing to lend.

A lot depends on what the appraiser determines. In my experience, appraisers can be right on the money—or way off. One time, I needed more money to finish renovating a house that was 90% complete. The bank ordered an appraisal before lending me the funds. The appraiser valued the house at $125,000 (as if it were finished), but I sold it six months later for $204,000. The appraiser obviously didn’t have a clue. Part of their accuracy depends on whether they do a thorough inspection of the property or just a “drive-by” appraisal.

A property that I was interested in purchasing from a seller who was behind on his payments mentioned to his bank that he had someone who was interested in buying his house, and the bank ordered an appraisal. The appraiser did a drive-by appraisal (just looks at the house as he drives by it). The appraiser appraised it at $200,000. Had he gone inside, he might have noticed that:

  • All the wiring and plumbing had been removed.
  • Much of the old horse-hair plaster was gone.

The owner had started to gut the place to turn it into a Bed & Breakfast operation when he ran out of money. It was just a shell of a building that looked okay from the outside but would take a lot of money to fix up and put into a usable condition. I can’t imagine anyone paying $100,000 for the house in its current condition… let alone $200,000.

Bank Loan Offer

After the appraisal, assuming the bank likes everything it sees, it will make you an offer to lend you x amount of money based on:

  • The appraisal.
  • Their rules regarding the percentage of the appraised price they will lend.

You will have a certain amount of time to either accept or reject their offer. You’ll have to decide how badly you want the house. I might mention that there’s very little negotiating with a bank on its terms, especially for a newbie. That being said, one of the things I have been able to negotiate (when interest rates were dropping) was:

  • A cap on the amount the variable interest rate could go up per adjustment (2%).
  • A cap on the total interest rate increase over the life of the loan (not to exceed 11%).

(I’ve been expecting inflation to raise interest rates for a long time, and since inflation is a component of interest rates, I wanted to make sure there was a limit to how much the interest rate could go up.) Of course, you won’t have this problem if you have a fixed-rate mortgage.

Closing the Deal

Since you have a contract to buy the property and you qualify for the loan, you will probably go through with the purchase—otherwise, you may be in breach of your contract with the seller. So, unless you have some extenuating circumstances, I’ll assume you will proceed to closing.

Closing is usually handled by an attorney or closing company chosen by the buyer and approved by the bank. The closer’s job is to:

  • Ensure all taxes are paid.
  • Make sure both parties get what is due to them.
  • Draft and record the new deed in the local courthouse.

The agreement usually provides for a final walk-through of the property before closing. It can’t hurt to take advantage of this opportunity—after all, things change over time. Something else you might do before closing is call the utility companies and inform them of the date you will be acquiring the property so they can transfer the utilities into your name as of the closing date.

House Hacking

If I were looking for my first house, I would look for a duplex or tri-plex with a vacancy and move into the vacant unit. The rent from the other apartment(s) would contribute money toward my monthly payments. I would still qualify for the owner-occupied interest rate (which is lower than the rate for a strictly rental property), and I could renovate the apartment while I lived there. Some people call this practice “house hacking.”

What Happens at Closing?

Assuming the attorney is prepared, he will have pre-prepared a government-approved form listing:

  • How much money is to be paid and received by each party.
  • Prorated local taxes.
  • His fees.
  • Any transfer taxes.
  • Insurance required by the lender.

He will also have received all funds from the buyer and his/her bank in advance. He will verify the parties’ identities and, assuming all parties are present, have each party sign the appropriate documentation that transfers ownership of the property from seller to buyer. (It’s possible to have different parties sign at different times.)

The buyer will also sign documentation for the lender, pledging the newly acquired property as collateral for the loan and confirming personal liability for the loaned money. Additional paperwork may be required, depending on the state in which the transaction occurs. You will probably also receive a key to your new home. Please consult with a local attorney to see what happens in your jurisdiction—this description is based on my experience in Pennsylvania and could vary elsewhere.

After Closing

After closing, I would go to my new home and take possession of it. That means:

  • Start moving my belongings in.
  • Possibly change the locks.
  • Read the water, electric, gas, and any other meters on the move-in date, just in case the utility company didn’t read them.

Alternately, you may be able to time things so that you don’t have to move in right away, giving you time to paint, install new carpet, etc.

Congratulations! You’ve just purchased your new home.
Paying Down the Mortgage

With each payment to the bank, you pay:

  • Interest – the bank’s earnings that keep its doors open.
  • Principal – the portion that reflects your ownership of the home.

The more principal you pay, the larger percentage of the property is yours. If you have an adjustable-rate mortgage (ARM), consider making small prepayments on the principal each month (perhaps $100–$200). That’s something we’ve done. This reduces the amount of principal on which the bank calculates your new payments when interest rates adjust.

When rates were dropping, lower interest rates lowered our payments upon adjustment. Now that rates are climbing, we also try to make occasional larger prepayments, in addition to regular small ones. We’ll see if our payments rise at the next adjustment. You should talk with your bank ahead of time to see how they handle small prepayments—some banks leave the payment amount the same and simply shorten the duration of your loan. Your results may vary.

What Happens If You Miss a Payment?

If you fail to make a payment, dire things could happen. There’s usually a grace period after your due date before penalties apply. Any penalties will be spelled out in your loan agreement, as will the foreclosure procedure.

Foreclosure is the legal process in which the bank takes ownership of the property if you fail to make payments and it sees no other way to recover its loaned money. The bank will:

  • Take title and possession of the property.
  • Sell it as quickly as possible.

Since banks aren’t in the property management business, they seek the fastest way to sell. Many states offer special statutes giving borrowers a final chance to pay off their loans before foreclosure happens. In any event, failing to make timely payments can severely damage your credit score.


SAVING AND INVESTING

If you earn more money than you spend, you can save the overage. Why would you want to do that? Because the future is uncertain, and you might incur an unexpected expense for which it would be helpful to have savings. Alternately, if you plan to retire or make a large purchase, you would need savings to live off of or to use as a down payment. The alternative would be to borrow against your future earnings until you can’t borrow anymore. Eventually, lenders will stop lending money to you, and you will have to spend all your time working to get out of debt—or declare bankruptcy. Then it would be even harder to borrow money. Most people agree that the best course of action is to save some money for a rainy day, a major purchase, or retirement.

SAVING AND INVESTING WITHOUT INFLATION

If your savings can be employed productively (to earn more money), then, in the long run, you can retire on the interest, dividends, or rent (passive income) you earn from your savings. Traditionally, people would put their money in the bank or buy bonds to earn interest, buy stock in a business (either a publicly traded corporation or a privately owned business) to earn dividends, or invest in real estate to earn rental income. This approach worked as long as there was minimal inflation. You could count on your money maintaining its purchasing power through your retirement years. Whole life insurance was also a viable way to save money for the long term, as were other insurance policies when inflation was low.

SAVING AND INVESTING WITH PRICE INFLATION

Unfortunately, there’s a problem with this approach in 2025/26: inflation. Inflation is the expansion of the money supply by those who control it—primarily the Federal Reserve Bank of the United States. Jerome Powell, the Chairman, is frequently in the news. See How Inflation Plays Out for the consequences of inflation.

The primary consequence of inflation is rising prices, making goods more expensive. Some people confuse rising prices with inflation itself, so we’ll call it "price inflation" to distinguish it. When price inflation occurs, any savings kept in the inflated currency will lose purchasing power. For example, if you save $1,000 in year 1, and year 2 has price inflation of 5%, at the end of year 2, you will only be able to purchase $950 worth of goods with that money. In 2021, the U.S. inflation rate was 7%. In 2022, it was 6.5%. See U.S. Inflation Calculator.

Your purchasing power is dropping fast. Since 1914, when the Federal Reserve Bank (the Fed) was put in charge of managing the U.S. dollar’s value, the dollar has lost 97% of its value. See Inflation Calculator. In other words, it takes 100 of today’s dollars to purchase what $3 could buy in 1914. You might think the Fed hasn’t done a very good job of maintaining the dollar’s value since 1914—and you’d be right. At the current rate, one might wonder how much longer the U.S. dollar will be able to purchase anything.

In the long run, high inflation rates make it difficult to plan for long-term projects. That means multi-year construction projects, building factories, manufacturing large equipment, even long-term insurance policies that will be paid in inflated currency units won’t buy as much in the future as they do now. Will your insurance policy cover your funeral expenses when you die?

Hedges Against Price Inflation

To protect oneself from the gradual erosion of the Dollar’s purchasing power, people have traditionally purchased gold and silver. Many people recognize that gold and silver are “real” money and that the paper (fiat) money that is commonly used today is merely a substitute (and a poor one at that). Thus, many central banks around the world are buying these precious metals as fast as they can. At the same time, they are using the paper futures markets to manipulate metals prices; i.e., keeping their prices artificially low by selling short and driving their prices down. At some point, this manipulation will fail and prices will over-react to the upside. In the meantime, gold and silver are being kept low through market intervention by the central banks of the world.

Real Estate

Today, some people also purchase real estate as a hedge against inflation. Real estate comes in different categories:

  • Commercial Real Estate - generally means real estate with buildings that are rented out to or owned by businesses that sell something to consumers.

  • Residential Property - includes rental properties or property owned by homeowners.

  • Raw or cultivated land - used for mining or farming, extracting raw materials for building things, or growing food. Growing food is a good business to be in during inflationary times since food prices go up as the money declines in value.

  • Timber - also favorite hedges against price inflation.

Collectibles
  • Baseball Cards

  • Comic Books

Most tangible items go up in value during inflationary times (assuming their prices aren’t manipulated or regulated by some government). They all seem to do a better job of maintaining their value than the U.S. Dollar does. (Other paper currencies are also losing their purchasing power, so you probably won’t gain anything by buying a foreign currency in the long run, unless they decide to back their currency with a hard asset like gold.)

In the past, when governments lose control of their spending and they print money to infinity, people start to hoard physical items that tend to retain their value. The same governments that cause the inflation then outlaw hoarding. In fact, they may even confiscate items from hoarders and distribute them to people who don’t have anything. It’s not long after that that society breaks down and chaos ensues. Shortly after that, a strong man like Napoleon or Hitler takes over and restores order.

Cryptocurrency

Today, there’s a new kid on the block…cryptocurrencies. The most popular and noteworthy cryptocurrency is called Bitcoin (BTC or XBT). Bitcoin uses a public decentralized ledger known as a blockchain and is thought of as a digital currency. It was invented in 2008 by someone known as Satoshi Nakamoto. Thus the smallest unit purchasable is called a satoshi. Because it has a set limited quantity, it will not be inflated very much. This assures that the price can only go up in the long run, relative to the fiat currencies of the world.

While a number of countries have banned bitcoin, and still others have implicitly banned it, many have not, including the United States. El Salvador has granted bitcoin legal tender status and Ukraine accepts bitcoin donations to fund its fight against Russia.

It’s worth noting that some people have objected to bitcoin on the grounds that its proof-of-work algorithm for mining requires the consumption of a growing quantity of electricity and they believe that this contributes to climate change although they haven’t objected to the use of electrical vehicles (EVs) and their ever-growing use of electricity. The bottom line is that bitcoin is potential competition for the fiat currencies of the world and so they are being bad-mouthed (and sometimes banned) by the establishment central banks and their dependent governments.

Buying a House

If you don’t mind maintaining a house and you plan to stay in your current location for some time, you might consider buying a house. Some landlords may even rent to you with an option to buy or a rent-to-own agreement. In my opinion, this is more likely to happen if you are renting a single-family house than if you are renting a multi-family house. For more information about these kinds of agreements, see https://www.investopedia.com/updates/rent-to-own-homes.

Many of my tenants save up their money and eventually move out into a home of their own. This was especially true when interest rates were low. With higher interest rates, the outflow has slowed. So, if you can choose a time to buy, you might try to do it when interest rates are relatively low, rather than high. On the other hand, the house you like might not be available any more if you wait for interest rates to decline, and prices may go up when interest rates go down. Alternately, perhaps you can re-finance the purchase later if rates drop. Your bank will undoubtedly have rules and restrictions on re-financing. Be sure you know what they are ahead of time.

Many people find that being pre-approved for a mortgage saves time in the long run. Getting pre-approved tells you how much of a house you can afford, what your interest rate and monthly payments might be, and what kind of mortgage you are qualified for. You won’t waste time looking at homes that are more expensive than you can afford. Also, if you plan to work with a realtor, he or she may require you to be pre-approved before beginning the search for your new home. You can become pre-approved by contacting most mortgage lenders via phone or their website. https://app.homebuyer.com/rates works with a number of different lenders and has a pre-approval app on their website.

Other folks prefer to find a house they like before approaching a lender. Perhaps they have money saved up or they have a wealthy relative who will help them obtain financing? Finding the right property could mean:

  • Driving around town looking for signs.
  • Looking online.
  • Calling a local real estate brokerage firm.

By driving around town, you may find a house that is for sale by the owner (FSBO) or one that is listed for sale with a local broker. The FSBOs are generally not listed online. If you look online, you may find properties that don’t have a sign out front. And by calling a real estate broker, you may find out about a property that will be available soon but hasn’t been advertised yet. So, all three methods have their good points and bad points.

If you are using a real estate broker/agent, he/she can be very helpful in guiding you through the process of buying a house. Not only can he/she:

  • Show you what is available on the market.
  • Pre-qualify you so you know what price range you can afford.
  • Present your offer to the seller.
  • Help you negotiate the terms of the purchase.
  • Help you find an inspector and/or a lender.

As with all agents/brokers, some are more helpful than others… and until you sign a listing agreement, you can switch from one that you don’t like to one that you do like. I should also mention that most brokers are working for the seller because that’s who is paying the commission. Even your broker will be paid by the seller when you buy a house unless you hire a broker to work for you as a buyer’s agent.

Home Inspection

Let’s assume you find a house you like. It’s probably a good idea to have the house inspected. You will have to pay for that. Ask your lender whether you need to choose an inspector from their approved list. If you hire a reputable inspector, he/she will check:

  • The roof.
  • Insulation.
  • Electrical system.
  • Plumbing system.
  • Drains.
  • Anything else that is readily visible.

I recently saw an inspector use a drone to take pictures of a roof. Shortly after completion, the inspector will write up a report and give it to you with his/her recommendations. If there are any major or minor problems with the house, you will have to make a choice:

  • Do you want to take the chance that the seller will correct the problems to your satisfaction?
  • Do you want to negotiate to subtract some money from the purchase price so you can correct the problems yourself?

If you don’t know anything about home improvement, you may want to find a handyman or two to give you a quote to correct the problems. If you opt to correct the problems yourself after closing, you may find more problems than you anticipated. It can be a tough choice to make. It is also possible that your lender will require the repairs to be done before closing.

Financing


Paying Cash

Unless you have a lot of cash lying around, you’ll need to finance the purchase. That means you’ll need to find someone who will lend you the money to purchase it. For the time being, let’s assume you are not a veteran, as there are many programs available to veterans that are not available to non-veterans. See Veteran Housing Programs for details.

On the outside chance that you have a wealthy relative who would lend you the money, you could see under what terms or conditions he/she would lend it. (I have had tenants who borrowed money from a rich relative to buy their first house.) Barring a wealthy relative, you may approach a bank. This is the more usual approach, in my experience. (Most purchase agreements provide that the agreement is contingent upon the buyer obtaining financing.)

Bank Requirements

What is a bank going to want from you? They will require financial statements, including:

  • An income statement.
  • A balance sheet showing your assets and income.

Banks prefer borrowers who can repay loans (and don’t like to own houses), so they typically require:

  • Liquid collateral (assets they can seize if you don’t repay them).
  • Cash flow (proof you can make monthly payments easily), which means a stable income source.

A job with a financially sound employer is usually preferable to self-employment, although professionals such as doctors, lawyers, engineers, and accountants may be exceptions. Banks also have preset financial ratios they use to assess borrowers. They will also specify:

  • The required down payment (normally at least 20%).
  • Any additional costs such as loan "points."

Then, based on the interest rate at the time and the loan duration, they will calculate your monthly payments and determine if you can afford them.

Appraisal

Next comes an appraisal, which you will have to pay for. The bank will hire a local appraiser—someone who supposedly knows the local real estate market and is licensed. Because appraisers are licensed, there is a limited supply of them, and so it may take a month or two to get the appraisal back. The appraisal is usually based on comparable properties in the area that have sold recently.

Based on the appraisal, the bank will decide how much money they are comfortable lending. For example:

  • If the appraiser values the house at $100,000, and you are offering $150,000, and the bank only lends 80% of the appraised value, they will only lend $80,000. You’ll need to come up with the remaining $70,000.
  • If the appraisal comes in at $200,000, the bank will be much more willing to lend.

A lot depends on what the appraiser determines. In my experience, appraisers can be right on the money—or way off. One time, I needed more money to finish renovating a house that was 90% complete. The bank ordered an appraisal before lending me the funds. The appraiser valued the house at $125,000 (as if it were finished), but I sold it six months later for $204,000. The appraiser obviously didn’t have a clue. Part of their accuracy depends on whether they do a thorough inspection of the property or just a “drive-by” appraisal.

A property that I was interested in purchasing from a seller who was behind on his payments mentioned to his bank that he had someone who was interested in buying his house, and the bank ordered an appraisal. The appraiser did a drive-by appraisal (just looks at the house as he drives by it). The appraiser appraised it at $200,000. Had he gone inside, he might have noticed that:

  • All the wiring and plumbing had been removed.
  • Much of the old horse-hair plaster was gone.

The owner had started to gut the place to turn it into a Bed & Breakfast operation when he ran out of money. It was just a shell of a building that looked okay from the outside but would take a lot of money to fix up and put into a usable condition. I can’t imagine anyone paying $100,000 for the house in its current condition… let alone $200,000.

Bank Loan Offer

After the appraisal, assuming the bank likes everything it sees, it will make you an offer to lend you x amount of money based on:

  • The appraisal.
  • Their rules regarding the percentage of the appraised price they will lend.

You will have a certain amount of time to either accept or reject their offer. You’ll have to decide how badly you want the house. I might mention that there’s very little negotiating with a bank on its terms, especially for a newbie. That being said, one of the things I have been able to negotiate (when interest rates were dropping) was:

  • A cap on the amount the variable interest rate could go up per adjustment (2%).
  • A cap on the total interest rate increase over the life of the loan (not to exceed 11%).

(I’ve been expecting inflation to raise interest rates for a long time, and since inflation is a component of interest rates, I wanted to make sure there was a limit to how much the interest rate could go up.) Of course, you won’t have this problem if you have a fixed-rate mortgage.

Closing the Deal

Since you have a contract to buy the property and you qualify for the loan, you will probably go through with the purchase—otherwise, you may be in breach of your contract with the seller. So, unless you have some extenuating circumstances, I’ll assume you will proceed to closing.

Closing is usually handled by an attorney or closing company chosen by the buyer and approved by the bank. The closer’s job is to:

  • Ensure all taxes are paid.
  • Make sure both parties get what is due to them.
  • Draft and record the new deed in the local courthouse.

The agreement usually provides for a final walk-through of the property before closing. It can’t hurt to take advantage of this opportunity—after all, things change over time. Something else you might do before closing is call the utility companies and inform them of the date you will be acquiring the property so they can transfer the utilities into your name as of the closing date.

House Hacking

If I were looking for my first house, I would look for a duplex or tri-plex with a vacancy and move into the vacant unit. The rent from the other apartment(s) would contribute money toward my monthly payments. I would still qualify for the owner-occupied interest rate (which is lower than the rate for a strictly rental property), and I could renovate the apartment while I lived there. Some people call this practice “house hacking.”

What Happens at Closing?

Assuming the attorney is prepared, he will have pre-prepared a government-approved form listing:

  • How much money is to be paid and received by each party.
  • Prorated local taxes.
  • His fees.
  • Any transfer taxes.
  • Insurance required by the lender.

He will also have received all funds from the buyer and his/her bank in advance. He will verify the parties’ identities and, assuming all parties are present, have each party sign the appropriate documentation that transfers ownership of the property from seller to buyer. (It’s possible to have different parties sign at different times.)

The buyer will also sign documentation for the lender, pledging the newly acquired property as collateral for the loan and confirming personal liability for the loaned money. Additional paperwork may be required, depending on the state in which the transaction occurs. You will probably also receive a key to your new home. Please consult with a local attorney to see what happens in your jurisdiction—this description is based on my experience in Pennsylvania and could vary elsewhere.

After Closing

After closing, I would go to my new home and take possession of it. That means:

  • Start moving my belongings in.
  • Possibly change the locks.
  • Read the water, electric, gas, and any other meters on the move-in date, just in case the utility company didn’t read them.

Alternately, you may be able to time things so that you don’t have to move in right away, giving you time to paint, install new carpet, etc.

Congratulations! You’ve just purchased your new home.
Paying Down the Mortgage

With each payment to the bank, you pay:

  • Interest – the bank’s earnings that keep its doors open.
  • Principal – the portion that reflects your ownership of the home.

The more principal you pay, the larger percentage of the property is yours. If you have an adjustable-rate mortgage (ARM), consider making small prepayments on the principal each month (perhaps $100–$200). That’s something we’ve done. This reduces the amount of principal on which the bank calculates your new payments when interest rates adjust.

When rates were dropping, lower interest rates lowered our payments upon adjustment. Now that rates are climbing, we also try to make occasional larger prepayments, in addition to regular small ones. We’ll see if our payments rise at the next adjustment. You should talk with your bank ahead of time to see how they handle small prepayments—some banks leave the payment amount the same and simply shorten the duration of your loan. Your results may vary.

What Happens If You Miss a Payment?

If you fail to make a payment, dire things could happen. There’s usually a grace period after your due date before penalties apply. Any penalties will be spelled out in your loan agreement, as will the foreclosure procedure.

Foreclosure is the legal process in which the bank takes ownership of the property if you fail to make payments and it sees no other way to recover its loaned money. The bank will:

  • Take title and possession of the property.
  • Sell it as quickly as possible.

Since banks aren’t in the property management business, they seek the fastest way to sell. Many states offer special statutes giving borrowers a final chance to pay off their loans before foreclosure happens. In any event, failing to make timely payments can severely damage your credit score.