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Things are about to get hectic around here.
We just heard from our neighbor that the developer is going to start building the townhouses across the street from us starting next week.
Is Buying a House a Smart Money Move?
Here in Raleigh if there's a sliver of land, they'll develop it.
It's a hot market right now and home are going up at a rapid pace.
Our property value has been rising since we bought our house three years ago.
We've received mail from realtors and have seen upticks with estimates from real estate sites like , Zillow, and Redfin.
Here's a summary from Zillow:
We take these estimates with a grain of salt, but they are a reflection of the home value growing.
Seeing this growth you might think we're firmly in the camp of ‘ needs to buy a house' and ‘real estate is smart investment'.
But we're not.
When we say personal finance is personal we mean it.
Buying your home is a significant purchase. If you do it right, it can definitely mean a huge win with your money.
If you do it wrong you guys are basically behind the eight . It will be harder to save for whatever goals you have.
I want to make sure that you guys have a solid foundation when you are house hunting.
In this episode we get into:
- how to know if buying a home is right for you
- real and total costs of home ownership
- how to figure out how much you can afford so you can buy a house and still pursue financial independence
Think of this as a checklist to make sure that your house is a blessing and not a burden.
Hope you enjoy!
Resources on Buying a House
If you're looking to buy, here are some resources to help you find an affordable place you love!
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- Grow Your Stash Faster: High Yield Savings with CiT Bank
- Jumpstart Your Marriage and Your Money
- My friend was about to buy a million-dollar house with no research
- The Fallacy of Homeownership
- What You Need to Know About Mortgages
- 9 Questions to Ask Before Buying a House
- Is It Better to Rent or Own a Home?
- Buying a Home: From Contemplation to Closing
Is Buying a House Now a Smart Move for Us?
Before you go house hunting, before you talk to lenders to find the best rates, you have to lay down the foundation – figuring out if home ownership really fits in with you and what your goals are.
For many couples, they get this pressure at a certain point in their marriage or in their career you get asked by co-workers, friends, and family about when are you guys buying a house.
But that is not a decision you want to be rushed into.
You two want to nail down your goals and see what's most important for you. So I have a few questions that help you put into perspective.
- What are your goals for the next 5 – 10 years? Do you plan on being in this home for five or more years?
- Do you have savings outside of your potential down payment?
- Are your finances strong enough for you to get a good rate on your mortgage? *Check your credit score
- Do you feel comfortable with DIY or have enough cash flow and savings to handle paying for work done?
You might be tempted because these questions aren't very complicated to skip over this or to rush by it.
These are crucial questions the two of you want to make sure that this house is affordable.
If you're like most couples you have several different goals that you want to tackle – personal, professional, and as a family – and you want to make sure you have room in your budget for them.
So make sure you nail those goals down and then you can see if one buying a house is the right move for you.
You can also use that information to tailor what house you're looking for based on your goals.
Beyond the Fine Print: The Real Costs of Home Ownership
All right. So the two of you have sat down and you said you know what we're going to buy a house. It fits in with your goals.
You may have adjusted the size or the type of home you want but you're going to move forward.
Let's talk about the real cost of home ownership that you may have heard this phrase that if you can afford X amount and rent then you can afford X amount and mortgage.
That is simply not true.
There's more to owning a home than your mortgage payment, let's look at that payment a little deeper.
Besides your principal, that's what you're doing to actually buy the house build some equity the mortgage payment that you send in goes towards other things such as interest, taxes, and insurance.
Another phrase that's tossed around a lot is ‘you're throwing away money when you're renting'.
Did you if you buy a house and have a 30-year mortgage, you’ll see that the first 7 years about only 20 % of your payments are actually going towards chipping away at your principle?
The higher the interest rate, the higher the interest each month and the lower the principal payment amount.
So you’re not building up that equity that people love to chime in with.
Home Maintenance and House Fund
Rule of thumb here is setting aside at least 1% of your purchase price for home maintenance like HVAC, roof, and so forth.
This money is separate in purpose from your emergency fund.
What to Consider When Looking at HOAs
Depending on where you live, you may find yourself buying property that is a part of an additional expense – a home association.
This can be a deal breaker for you guys, both financially and hassle wise.
If your home has an HOA, you have an extra bill to pay plus whenever you have a project, either outside or in, you could have to run it by them to see if it’ll be approved.
A while back, Jon white was on the show and he shared that he found out the hard way when he was hit with $5k special assessment!
So keep that in mind when you're hunting for a house.
How Much House Can We Afford to Buy?
Let's run the numbers and see what we come up with.
We’re going to use two examples to review these rules of thumb so you have an idea.
One couple let's call them – Amy and Rory – have a net household income $50k (4,167/month).
The second couple – Iris and Barry – take home is $70K net ($5,833). They’ve paid off their ccs and cars, but they still have student loans of $32,000 and their monthly payment is $340.
I’m going to keep it simple, but if you really want to dig into what if and play with the numbers, please check out the resources for cool calculators and tools.
Here are some rules of thumb that can help you stay on track.
Keep Your Total Housing Costs 25% (Or Less)
Want even buffer (look at the , not gross pay) and mortgage between 2.5x – 3x your income.
Let's go back to our two couples and see how that translate:
- Amy and Rory – $1,040/ $125,000 – $150,000
- Barry and Iris – $1,458/ $175,000 -$210,000
If you notice, we're haven't looked at the down payment yet. We're just shooting for a target based on income coming in.
Have Your Finances in a Stable Spot
Have saving outside of your down payment (3-6 month emergency fund)
Have a buffer with your cash flow. Can you still save for retirement, vacations, and be able to refill your emergency fund?
Minimize (or eliminate) your debts.
No high-interest debts for sure. Having a high amount of debt can ruin your chances of getting a loan.
Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income.
You want to make sure your ratio is lower rather than higher. If your debt to income ratio is higher than 36%, you could have a hard time qualifying for a mortgage.
- Amy and Rory – (car loan $380) DIT: 33%
- Barry and Iris – (student loan $340) DIT: 30.6%
Shoot for 20% or more with your down payment.
Another reason to take your time and build a down payment is the loan to value ratio and how it affects your chances of getting a mortgage.
The loan-to-value (LTV) ratio is basically the mortgage loan amount you’re hoping to get divided by the appraised value of the property you’re considering to buy.
Now I know I just gave you a lot of numbers and hearing them may seem overwhelming, but keep these two things in mind.
There are plenty of handy apps and tools – many of them free- to help you run the numbers pretty quickly and easily.
Most buyers skip or gloss this part and pay a hefty in all senses of the word. You do better and have a big win with your house.
Key Takeaways on Buying a House
If you're in a rush, go ahead and save this page. Before you leave, here are some takeaways.
- Nail down your goals. Where does buying a house fit in?
- Run the numbers together. Use calculators I linked to up in the resources section.
- House hunting is a treasure hunt. Look for the gems.
If you’d like to chat more about the realities of working from home and starting a business, please join us in our private and free Facebook group – Thriving Families.
Hope to see you there!
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Thank you so much for listening to the podcast!
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This episode was originally released in March 2019. Show notes have been updated March 2021