Marching on with our Examine Your Motives Series, it’s now time to discuss Buying a Home. How appropriate in this current era of falling house prices and rising fear of recessions?
I’ll try to make this a timeless article by ignoring the current market situation and keep things general. I’ll also speak to our own thought process when we bought a home just a few years ago.
It’s just too difficult to outline everyone’s situation without leaving someone out. Some of us are looking for our first home, but we have a lot of debt. Some of us own a home and are looking to downsize. Some of us are living with our parents and don’t think that we ever need to move out (You know who you all are!). But there are basic questions that we can ask before even looking at MLS listings or contacting a Realtor:
Why do you want a home? As an investment, a short-term place to live, or a place to retire?
You have to be pretty good to flip a house and make a profit in any year, much less during a pending recession. If you’re looking for an investment, find an inexpensive place to live (rent or own) and put your disposable income into a retirement account. However, if you want a place to live, then predicting the future 5-10 years down the road is tricky. Buy a place you like, rather than somewhere that is just adequate to get by until the next place.
How long do you plan on living in the home?
Are you buying a studio condo as a starter for just a few years, with plans to move in 3-5 years and make a profit on the sale? Or are you planning on retiring in this home? You shouldn’t buy with expectations of a profit on your sale. And you shouldn’t buy just for a short-term solution. You can’t predict what will happen to the market 3-5 years from now, much less your job, health or family situation, so if you only need a short-term housing, then why not rent? We’ll talk about renting shortly.
Can you afford to buy a home?
Well, duh, can you afford the monthly payments? Lenders are now looking at your mortgage to be no more than 28% of your gross monthly income, but in reality, you need to look at the rest of your monthly obligations and debt to determine how much breathing room will be left over after the bank takes its cut of your paycheck.
When we bought our home, the total mortgage, with principal, interest, taxes and insurance (PITI) took about 29% of our gross paycheck, or about 37% of our take-home pay. Tack on our minimum debt payments (car, credit card and student loans), and we we only had about 30% left to pay for utilities, groceries, gas, tithing and every other incidental. We weren’t hurting, but we didn’t have nearly as much room as we have now.
Currently, our numbers are 20% gross pay, 30% take-home pay and 57% left after our minimum debt payments. However, we couldn’t have known what we would be making in 3 years, so it was a gamble whether we could continue to afford the home.
Are you buying because everyone else is buying?
We jumped on the bandwagon. We didn’t want to be left out, and everyone was talking about rates increasing (they already had been). We were scared and uneducated. We bought our first home without researching very well. Luckily, it turned out alright, and we love our home and location. But why did we listen to gossip, rumors and other uneducated buyers instead of being patient and taking our time to find the right place at the right price at the right time?
Because I was in charge! Actually, we were nearing the end of our lease, rent was going up $200 a month (we had a discount for the first year), and we liked the idea of owning our own home. Ignore the fact that we spent hundreds of thousands of dollars of someone else’s money (the bank’s). Ignore the fact that that we don’t use 2 of the 3 bedrooms except for storage (see the next question). We seriously got a house because people said that’s what you normally do. You get married, buy a home and have kids.
Oh, and you’d be throwing your money away by renting! Aww, that’s a bunch of crap. Give me a calculator and I can prove that renting is cheaper than owning our home in the long term. Why? Because you can usually rent for less than the total cost of your mortgage PLUS home repairs. Ahhhh, you didn’t think about that one, did you? Yep, home repairs can cost hundreds or thousands per year, and by renting, your landlord is responsible for those (unless you pushed your roommate through the wall). Oh, and don’t forget about homeowners association or condo fees. We don’t pay them in our community, but others pay up to $400-500 extra per month!
Are you buying because you need more room?
I look around our house and ask myself “Where did I get all this junk and why do I need it?”. Honestly, we could still be living in our one-bedroom apartment from 5 years ago had it not had mold in the vents. We could have stayed in our rental townhouse, but we jumped on the single family home bandwagon because we thought we needed it. Then when we moved in, we had all these extra rooms, and nothing with which to fill them up. Oh, the horror of an empty space!
Take a look around your home. Do you REALLY need more room? C’mon, look again. Can’t you just get rid of that old desk you found in the dumpster, or that coffee table you keep banging your shin on? Isn’t it just another place to put junk? Would being more organized and efficient cancel your need for more room? Stacie and I actually talk about how we liked the old place and wouldn’t mind living there again. But with all this crap in our house, we could never find room in an 1100 sq. ft. apartment! Sometimes, you just need to take stock of what you need and don’t need, and take control of your stuff!
What can owning a home offer to you that renting can’t?
This is your last line of defense. Ask yourself why you really need to OWN that townhouse instead of RENTing one. Do you really need to have a place you can paint purple? Can you paint your existing rental as long as you paint it white when you leave? Do you really just have the itch to do home improvements? How about joining Habitat for Humanity and working on someone else’s home? Do you really think renting is throwing your money away? Do some research into home costs (including repairs) versus renting.
Don’t just buy a home because your friends are doing it, or you’re afraid of missing something, or because you “want freedom and stability”. Home ownership is not a financial investment. It’s an emotional investment. You probably want to buy a home because you’re imagining your kids running through the house for years to come, or doing whatever you want to the walls, but in the end, you’re really tying up a lot of money into a single material possession when you have other options.
After being homeowners for a few years now, I’d be lying if I said that I would never own a home again. But in the future, we would ask ourselves more questions about our motives for owning the home, and be more patient with the process. We lucked out with our first home purchase, but it could have gone totally wrong. We didn’t educate ourselves about the loans we were purchasing, or the risks and costs of home ownership.
Oh, and our last rental was $700 less per month than our current mortgage (with PITI). That’s a little more than what we get back in taxes each year on our interest paid. We have more room, a yard, a pool, and a better location, but is it worth the hassle of maintaining the home ourselves? Time will tell.
Photo Courtesy of dbking