On Home Buying

One big step in life is buying a house.  Most people that have the ability to read this have purchased a home at some time or another in their lives or will be doing so at some point in time.  There was a question on a forum that I belong to as to when does someone know if they’re ready to buy a house and what considerations should be kept in mind for this monumental task in one’s life.  A well known forum member answered as did I.  Here are those answers (slightly altered to fit outside of the home forum).

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Posted by Alex from Fifty Week Vacation:

It is awesome that you are considering looking at buying a personal residence. As a disclaimer, I own a home but personally am not the biggest advocate on home ownership. Hey, it’s a personal decision and I want a happy wife for a happy life, hence for us, we bought a home in the area we wanted to be.

——– As an example for this comment, let’s assume the house will be roughly $225k. I am going to use roughly a $200k loan at 4.25% which has a $1,000 mortgage payment each month. Again – I chose this amount as it’s close to that and keeps the math easy. These are all estimates since it makes a huge difference [depending upon location].

0 – You can “write off your mortgage interest” is a load of crap for most people. Don’t buy a home for this reason. It’s like spending a dollar to save $0.25. Sure you can itemize, but you already get a ~$12k standard deduction which minimizes [the] effects. A whole article [could be written] on this.

1- Are you sure it is cheaper to buy than rent in your area? Remember that the mortgage is just the start. You might have a lawn, a $300 HOA, trash services and have to pay for parking.

2 – Things break. I had a lovely $1,300 water issue recently. Are you prepared for things like that after the home purchase and the car breaks? For rental property it’s common to use 1% of the purchase price for repairs over the long term and I think that this is a decent gauge for a residence over the long term. However, home repair does not like to come in a consistent basis, it’s more like $1-5k chunks.

3 – Take your time when looking and don’t fall in love with the first place. There are lots of homes, do your homework and get an inspection. You learn so much about your home through this process. I really can’t imagine why you would not get an inspection. They are $300-$500 which is nothing in the scheme of home buying. It is crazy that people [would consider buying a home] without inspections, however it shows you how hot the market is.

4 – Consider the type of residence you’re buying. New homes tend to have less issues up front but cost more. Older homes can cost less but have more issues. In my area, condos are cheaper than single family residences but have really high HOA fees. I have friends that have $700/month HOA fees. $700!!!! On the other hand, single family homes are more expensive than condos but have little to no HOA fees. Townhouses are usually in the middle.

5 – Check out SOFI for loans. With 10% down you can avoid PMI on a personal residence. If you have to pay PMI on our example home here it’s going to be about $150/month.

6 – Get an inspection. Yes, I am repeating this.

7 – Consider the taxes for home ownership. Taxes can be – 0.5% – 1% of the purchase price easily and it is a decent estimate for a home. $225k home would be $100 – $200 per month. (Again rough numbers here)

8 – Are you going to stay in the house for at least 10 and probably 15 years? It’s all interest up front on the loan and it costs money to get in and out of a house. On our $200k loan after 10 years you would have paid only $41,000 in principal, yet $71,000 in interest. The 15 year story is not a whole lot better. Your principal can be greatly reduced if your home falls in value and you sell, or with closing costs. (See below about closing costs)

9 – When buying and you aren’t paying closing costs, you still have a loan origination fee, lawyer fees, deed fees, you might have an HOA initiation fee, etc. On the way out you having closing costs and a few fun fees. Sometimes buyers will pick them up depending on the market and how bad they want your home. If they don’t, hello 6% of your home sale (At least in my area unless you can negotiate a better deal). On a $225K home that is $14k.

10 – Homeowners insurance – for our example home you might be around $100 (Round numbers for ease of calculating again)

Whew – Hopefully I didn’t lose you there. These are my thoughts and I hope that they are helpful. A home is a HUGE purchase and I want you to be aware of all the costs associated, and I think that I covered them all, but you need to do your homework, too. They are a lot more expensive than people think but want you to be aware of as many as I can think of. To recap you might have all or a few of these:

At time of purchase:
$300 -500 inspection
~$5,000 in loan, lawyer, etc. fees / escrow for 1st year of taxes / insurance
Down-payment – Assuming 10% you’re in for $22,500
Moving costs
Total on the way in – Roughly $28,000

Monthly on-going costs –
$1,000 mortgage
$150 taxes
$100 Homeowners insurance
PMI – $150/month for about 10 years unless you have a large enough down-payment.
HOA is a wildcard. It could be 0 or could be $700
Your bills might go up from renting or they might not. Another wildcard.
Trash/lawncare-more wildcards
Repairs – Here if you use the estimate of 1%/year it would be $188/month. It is never this smooth though.
Total monthly – $1,250 + Repairs and wildcards and PMI if you have it

At the time of sale:
6% – $14,000 (Again it all depends on your situation and the market.)
Some fees will be sprinkled in as well
Moving costs
Total on the way out – $14,000+ ( This eats into the equity you built up)

I think that this is a good start and will give you some things to think about. Hope it helps and good luck with the hunt. There are many wonderful things about owning a home and the intangible things that it can provide. At the same time they are not cheap, so take your time and do your homework.

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Here is some of what I added:

A few other things to consider:
You may need to furnish or otherwise customize or outfit your home (electronics, decor, painting, flooring, etc.)

Initial improvements/changes to the home (redoing/remodeling some small or large part of the house)
for example, we removed some cabinets in our kitchen and added a wall and door in the master bedroom’s bathroom to enclose it all before or shortly after we moved in.  Don’t be afraid to try to do these things yourself or help someone that really knows how to do these things.  Learning new skills is very good to do!

You may have some decent sized “down the road” expenses to save up for (often found in the inspection).  Use those to your advantage in negotiations as well as keep them in mind for actually saving the money for those items!
for example, we very recently had our roof redone ($6k-7k for us), will be having the house painted this summer ($3.6k), and in the next few years, our garage floor will have to be ripped out and redone ($10k-15k? – it’s looking like a sinkhole is forming under it!)

You may have some cool upgrades that you would like to have some time in the future as well.
for me, I’d like to have solar panels (~$12k) on our house and/or some kind of urban garden or permaculture type of thing in our backyard and/or basement.  There is money and time considerations with those types of things.

Things change.  I wasn’t a Mustachian in training or anywhere near it when we first got our house only three or four years ago.  If I knew then what I know now, I’d have opted for a smaller house and been a bit more picky on some aspects of the house.

Roommates or renting out an extra room to guests or something could help you offset some bills.  We don’t do this, but it’s something to consider.

Future children.  We’ve got two kids and they want for nothing (we spoil them).  It’s mainly my wife’s decisions there, but kids are definitely considerations and a big topic of discussion before & after they are around (basically always).

Always, always buy far less house than what the bank tells you that you can.  We made this mistake and purchased very near the top of our range.  Things weren’t too easy with our budget the first few years.  We’re now making a bit more money and thus have a healthier budget with more wiggle room, but if anything decently major would have happened the first two years or so in our house, we would have been toast.  I’d highly recommend having a real emergency fund of 3-6 months of expenses that you will not touch or even consider touching for normal house related things.  Have, at a minimum, $6k for true emergencies like HVAC or water heater or car replacement/repair, medical needs, etc.  If you need, get this money in cash and store it in a safe deposit box in a town 30 mins away.  Don’t consider that you even have it for anything house related.  Personally, we have trouble with this, but are working on it after the fact.  I’d strongly recommend that you don’t do it the way we are 😉

I hope that these things help out in addition to the list that Alex provided.

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Hopefully this advice and these considerations will find a good home in the minds of those looking to buy a home.  My advice actually mainly comes from the perspective of buying our second, larger home after selling our ‘starter’ home.

If you would have other advice, perspectives, or other commentary, feel free to reply.  Pearls of wisdom are greatly appreciated even though they may not be heeded by those in need of them 😉

Thanks much!
Geoff

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