Before you buy a home, see if it makes sense.
Home Ownership – Plan Before You Buy
As we mentioned yesterday, we decided to buy a townhouse in our city. It’s in a new development and we’ll have 3 bedrooms and 2 1/2 bathrooms. It’s situated about 5-7 minutes away from the interstate, so the commute time will not change by much. It’s a big purchase, but we think we made the right choice.
This may have seemed a little sudden but we’ve been keeping an eye out for awhile while we were building our savings. I didn’t think I would mention it here on the blog until something happened.
Renting vs Buying
We carefully looked at the question: Can we afford the costs of home ownership? Many people assume that they can based on what they pay in rent. They figure if they pay $900 in rent they can afford a $900/month mortgage payments, but that isn’t necessarily true. Besides mortgage, can you afford to pay:
- Homeowner’s Insurance
- Private mortgage insurance
- Home Association Fees
- Property Tax
- Maintenance & Improvement
Looking at the same situation, if you still want to be a home owner, either you’ll need to have a lower mortgage or you will need more money to cover your expenses. The best option, though, may be to wait a bit more and continue renting. In fact, with some areas having a lot of empty homes, you may be able to rent a home at a decent rate. This gives you the option to test run home ownership without the big commitment.
Don’t just assume that buying a home is better than renting. You have to run the numbers yourself. Spreadsheet templates are an excellent solution to running the numbers easily. Find out and don’t just fall into the common myths of homeownership.
We used a spreadsheet to look at several houses in the area and saw what would fit in our budget and what would be too much or too risky for us.
What We Decided We Could Afford for Mortgage
If you remember from our examination of mortgage calculators, we decided to err on the side of safety and went with a more conservative mortgage amount. Our goal is to keep our housing costs (mortgage, taxes, and insurance) no higher than 25% of our monthly income.
We also decided to go for a lower mortgage because we are planning to accelerate mortgage payments and save tens of thousands on interest.
Taking the $8,000 Tax Credit
We’re also going to take advantage of the $8,000 tax credit for first time home buyers. The purchase has to be made before December 1st, 2009, it has to be our primary residence, and we have to stay in your home for three years. We meet the requirements as we see this as a long term commitment.
How about you?
What are your goals? Do you plan buying a home in the next few years? Is renting a better option for you and your area?
Photo Credit: Fabio
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I think you made a wise decision to follow the 25% rule. Some who go beyond and even get up into the 30 – 40% range find it’s a real strain on the budget. Congrats on your purchase!
Thanks Jason! We’re focusing on build a cushion to cover unexpected expenses.
We’re glad that we bought our home. We figure that when we are done here, we will have broken even (interest payments and what not), but we will also have a nice chunk of cash from the equity we built to put a bigger down payment on another house. I think you’ve done a great job of doing your homework and making a good choice.
I appreciate the support. I’m so glad you’re so happy with your home!
I am know where ready to buy a house, maybe 10 years from now, but it seems like today it’s all about saving as much as you can before looking at a mortgage and the costs involved with a house.
I appreciate this post very much. We bought our home about two years ago and it has not been a good situation for us. We did a zero downpayment loan, so we pay more on our mortgage than we were in rent and have no money for improvement, or major maintinance. Then when my husband got laid off a couple of times last year we had to re-negotiate our mortgage and now owe more on it than the house is worth. It’s very stressful and not what I had hoped it would be at all. Yeah, homeownership has not been everything it’s cracked up to be.
I think that it is great that you decided to take the plunge. I have been a homeowner now for going on 6+ years, which isn’t bad considering I am 28, and I have loved most of it. Paying the mortgage sucks but I love my home and it is kind of mine. Congrats!
I do have the goal of owning a house someday, although there are numerous considerations that will affect when (and even if) that becomes a reality. My fiancee actually owns a house, but she lives so far away that one or both of us will have to move to make things work. We’ll have to see where life takes us, I suppose.
Congrats for buying your new home and taking advantage of the 8K tax credit! Good timing!
I think you will absolutely LOVE homeownership. People don’t tell you that priceless feeling once you buy and first settle in. It’s awesome.
We have a 30/30/3 principle at Financial Samurai. Spend no more than 30% of your monthly cash flow on your mortgage, have a 30% downpayment saved (20% for DP, 10% for cash buffer), and spend no more than 3X your annual income.
Next up for you will be rental property!
Hope to see you over at FS one day.
Best
Hi GP – Congrats! I thought I posted a comment earlier, but i guess it didn’t get saved. Owning a home is priceless. I think you’ll truly love it.
We have a 30/30/3 principle where we spend no more than 30% of gross income on the mortgage, have 30% down for the value of the house (20% down, 10% cash buffer), and pay no more than 3X your annual gross salary. I find it works very well for me and my property buying experience.
Enjoy the new place!
Laura–I love reading your posts here and on Five Cent Nickel on homebuying. You’re giving outstanding advice as someone who is actually going through the process.
But just to offer some thoughts on the homebuying process, I’d like to add that it isn’t all a dollars and cents calculation, there can be more involved than just making a buying decision based on your ability to afford it (versus renting).
One thing you have to factor in with owning is loss of mobility. Millions of people have lost their jobs in the past couple of years, and the ability to pull up stakes and move to a new city for employment will be considerably more difficult if you have a house to sell.
In addition to the time required to sell, there’s a very real prospect of facing a financial loss–maybe even the need to write a check at closing–in order to sell a house. A renter doesn’t have that issue.
So I’d like to add that another consideration is the type of work you do, and the availability of jobs in the city where you are buying. If jobs in your field are thin in your city, you may need to consider this in the buy vs. rent decisi0n. In many fields, it’s much harder to find work than it has been in many years, and it’s a good idea to avoid the sell at a loss to take a new job situation.
Thanks Kevin for pointing out another factor to put into your decision. I think this is an issue to seriously consider if your local area has been hit hard by the recession.
Sounds like you guys did a good job of actually considering all of the costs upfront. So many people just simply jump into it without considering all of the expenses and eventualities and then wonder why they don’t have any money left.
Hey GP,
I actually went through offers for properties on three separate occasions before I came to my senses. I worked as a Realtor my senior year of college (08′) and for a while after. Those deals falling through made me a believer in things happen for a reason because in each offer something funky happened.
Anyways, in hind sight I was completely not ready for it because my priorities were actually Traveling and following my passions, which required me to leave my home town. However, I think if you’re completely happy in the city you’re at and won’t regret being attached to where you live, you’ve just made a great and very smart decision. Enjoy your new townhouse and enjoy the extra $8k.
Ryan