Owning a home is “The American Dream.” It’s a natural part of life. Everyone says you should own a home.
I’m not a big fan of what “everyone” is doing or saying. Owning a home is hard and scary and expensive! It is not for the faint of heart.
Lessons from the 2008 Housing Crisis
When I graduated college and had to move to New York for my first job, my parents were keen on helping me buy a house. “Don’t waste your money on renting. It’s so expensive up there, you need to buy and build equity.” I will always remember the wise advice from a realtor at our church: “Rent for a year or two. Find out where your coworkers and friends live. Get used to the area and figure out where you want to be for the long haul.” Did I mention that I was starting this job in 2006? Hello, Housing Bubble! This awesome woman was giving some sound advice that went totally against the grain at the time. I thanked God that we decided I should just rent. Two months after I started that job, my parents’ house had a devastating fire. I just wanted to be back home with them but I made myself stay for two years (I had to keep my sign-on bonus and have a solid length of time on my resume, of course). If you’re doing the math, that means I left my job (and my apartment) in the fall of 2008. Hello, Housing and Financial Crisis! If I had bought a place in 2006 and had to sell in 2008, I would’ve lost a ton of money and probably would’ve had to wait a while to actually make the sale. Since I rented, I just gave the 60 days notice when my lease was up and I was out of there! Back home with Mom and Dad and paying a lot less in rent (yes, I say less because my dad still charged me rent. No, he didn’t save it up for me or anything. I’m not complaining. I became the financially savvy adult that I am because of my dad. Financially savvy parents charge their kids rent and put it toward their own goals. And their kids turn out to be financially independent individuals. Crazy, huh?)
The Natural Order of Things
Flash forward a few years and now I have this adorkable boyfriend. In our late 20s, getting out of our parents’ houses was paramount so that’s exactly what we did once we both had stable jobs. I don’t even remember considering buying at that point. We had to save for our wedding! But once that was over, we started saving for a house. That was the next thing. I wasn’t super excited about it, but I knew that was our next big savings goal. Then I got pregnant…while we were still renting our apartment. Gasp! I remember everyone around me saying how they weren’t going to have kids until they owned a house. That’s the natural progression. You have to do things in order. I think that was our original plan too, but life happens. If you haven’t noticed, no one is doing anything in order anymore. People are having kids before getting married (or even before finding a mate – science is amazing). Don’t rush into buying a house just because you think that’s what you’re supposed to do. We had a baby while living in a tiny cramped apartment. We survived.
Within three months of our son’s birth, we had bought our home. (I still don’t know how we bought a house and moved with a 3-6 month old.) At that point I’d been aware of Suze Orman’s rules for buying a house for a while, and they still apply. Here’s how you know you’re ready to own:
1. You’ve saved up a 20% downpayment.
Why this 20% number? If you put less down, you’re going to be paying PMI (private mortgage insurance) on top of your monthly mortgage (and taxes and insurance) payment. You want to have equity in your house and the 20% gives you that. Your mortgage will be more manageable because you’re putting more down up front. You’re seen as a better buyer.
2. Make that 23%.
A good friend of mine went through the home buying process before I did. She often asks me for financial advice and had asked me about the financial ins and outs of owning a home but I didn’t know much beyond Suze’s rules. I really had my head in the sand because I LIKED renting and didn’t look forward to owning a house. So she went off and did her own research. I’m so glad she told me that you didn’t just need to save 20%, you needed to add an extra 3% for closing costs! Thousands of dollars extra for all these random fees. If you barely have the 20%, you’re going to be very surprised by these costs, so make sure you have that extra buffer!
3. You know how much house you can afford.
A percentage of what though? To calculate that 23% savings goal, you need to know the price of the house. You can do some research in your area to know how much the house you want will cost approximately. I remember going on Zillow to look at houses and decided my goal was to buy a $200k house. Then I knew I had to save $46k (23%) for a downpayment and closing costs. But I also used that number to calculate the mortgage – and taxes, people forget about taxes – that I’d have to pay on a monthly basis. A lot of folks think that saving the downpayment is the hard part. But in reality, that’s a short window of time. Maybe it takes you a few years to save up. But your actual mortgage payment is something you’re going to be dealing with for DECADES. Make sure you can afford that. And by the way, your overall payment (which includes not only the bank loan, but property tax and insurance) will most likely go UP every year. While your loan payment stays the same for the length of the loan, your property taxes and insurance will probably go up slightly year over year. If you buy a house that is on the high end of what you can afford, you may not be prepared for the annual increase. Leave some buffer in your budget. And make sure that YOU decide on how much you can afford, not the mortgage company! We were approved for a much higher-priced house. Since I was on maternity leave when we bought, the mortgage underwriters didn’t think they could factor in my income (don’t they know it’s the law to protect the jobs of new mothers?!) so they approved us on my husband’s income alone. I laughed because I knew we could NOT afford this house on just his income at the time. Remember that YOU know your situation best.
4. You can secure a fixed 15 or 30 year mortgage.
Adjustable rate mortgages contributed to the housing crisis and so many foreclosures. Make sure your interest rate and monthly payment are locked in when you buy. No surprises!
5. You can afford not only the downpayment and the monthly mortgage payment, but also the maintenance and repairs.
As I got into my late 20s, people around me were buying their first homes and I was now paying attention to all the horror stories that come with home ownership. Trees falling on your house. Fires. The plumbing leaks and causes a flood. Infestations. Asbestos. So many things can go wrong! When you rent, the landlord or property management is responsible for all this. You just tell them the problem and they fix it. You’re not financially responsible for it and you don’t have to experience the hassle of getting estimates and rearranging your schedule to accommodate repairs. When you own, it’s all on you. This is why I recommend having an extra line in your monthly budget for a home maintenance fund. It can be there for the unexpected un-fun things you’ll inevitably have to take care of, but you can also think of it as savings for the renovations you WANT to do. We have a house fund that is separate from our 8-9 month emergency fund. We also have to pay for water and sewer utilities that were previously included in our rent. We pay for pest prevention. There are so many other little expenses (that add up) when you own a home. Be prepared!
6. Speaking of emergency funds, make sure you have that saved up BEFORE you buy the house.
Another Suze rule. After our wedding, I made sure we had our emergency fund in place before we saved up for the downpayment. And I made sure it was the emergency fund amount that would suit our FUTURE budget living in the house. Owning a home greatly increases the likelihood for unexpected expenses. That emergency fund will come in hand for sure!
7. You know you’re going to stay in the home for 5+ years.
Maybe you are blessed to have all the money to buy a home, but your life situation at the moment is a bit uncertain. If you’re single and open to relocating for a job, why would you buy a place that ties you down to a particular area? You’re free to go wherever you want. Renting maintains that freedom. I knew when we bought our home that we were staying put for a while. Our jobs, families, and church were all local and we didn’t want to leave any of it. But in 2006 when I was starting my first job and had no idea what to expect, I’m so glad I paid that $1500 a month to rent in Westchester County, NY. Worth every penny to be able to up and leave after 2 years with no strings attached! I also don’t expect that we’ll be “upsizing” our home in the future. I made sure we could afford the house that would suit us for the long haul. I hate the home-buying process with every fiber of my being, but I also know it’s a lot easier to buy a house when you don’t have to worry about selling the one you’re in. We were able to overlap our apartment rental with buying our home so we could take our time doing some light renovations and then move in slowly. When the mortgage company doesn’t think you can afford two houses, you have to sell and buy on the SAME DAY. I seriously can’t imagine that coordination effort.
8. You have your OWN reasons to own, not everyone else’s.
Reasons like “I’m throwing my money away by renting” or “I should buy so I can get the tax deductions” are not good enough. With the tax code change enacted for the 2018 calendar year, many people won’t even be itemizing their taxes anymore so it won’t matter if you own a home or not. “Real estate is a good investment” doesn’t work if you’re talking about the home you live in. Remember that the house you live in is a liability, not an asset. Rental properties are investments, but that’s a whole other blog post yet to be written.
Is Your Heart In It?
Our house hunting and buying experience was a whirlwind. There was only a month between the first time we looked at a property and when we actually settled on our house. And the whole time I was not excited at all. I didn’t LOVE my house. I was not emotional. Close friends kept asking me if I loved my house and told me that I would eventually be happy that I bought. It’s been almost 4 years and while I’ve come around a bit, and am very thankful we haven’t had any major repairs since we moved in, I am still one of the first to proclaim the benefits of renting vs buying if someone is on the fence. It is a big decision that requires significant preparation. I hope these rules help you make the best decision possible. For those of you that have bought a home, are there any rules that you would add?