Sure You’re Ready for That?
Posted on June 28, 2006 15 Comments
Conventional wisdom holds that as soon as you can afford to buy a home, you should. And by “conventional wisdom” I mean my family. And by “as soon” and “afford,” I mean by employing any means possible – who cares if you don’t have a downpayment?
But I’ve decided that I need to save up for a down payment, and so I’m currently loading about $400 per month into my savings account thanks to a crappy apartment that rents cheap (I pay about $500 per month in rent). Whenever I get frustrated by my lack of space or desire for hardwood floors in a vintage building, I remind myself that swankier digs mean more time until I can buy a place of my own.
Aside from finances, there are other reasons why you might not be ready to buy a place just yet. A friend of mine who bought in her mid-20′s lamented last week that she couldn’t afford to move to a new city (in this case New York) because she was tied to her condo, and selling would get her next t0 nothing in NY. (She’s currently in law school and will have loans to deal with, which also erodes her purchasing power.) She told me if she knew then that she wasn’t “settled down” yet with her career or lifestyle choices, she would have never bought so soon.
It’s clear that most of us eventually want to buy a home. It’s a solid investment that, in most cases, can grow over time, and it offers the possibility of stability – after all, once you pay the mortgage, it’s yours to keep. Additionally, I hear good things about home equity and the purchasing power it can afford you (though, admittedly, I know nothing about it).
But rather than encouraging young people to buy homes before they’re ready, I think we should encourage them to get their financial houses in order before making the big move. Save up for a downpayment, closing costs, home repairs and other emergency costs. Ensure you’re settled, or that if you want to move away you have the resources to do so.
The Chicago Tribune has something to say about this, and you’ll find I echo the reporter’s sentiments. Read on…
Renters should examine finances before jumping into homeownership
Chicago Tribune
By Gail Marksjarvis
Posted June 25, 2006
Two years ago, Andrea Eaton had just finished studying financial planning at Texas Tech University and was tempted to buy a home as she started her first job in Minneapolis.
After college apartment living, the last thing she wanted to do was to rent again. The apartments she found were discouraging–cramped and drab for the price. So she considered buying a townhouse, and a mortgage broker assured her she could handle the payments.
By the time she heard what he had in mind, however, she dropped the house idea and was satisfied paying rent. Buying a home then would have meant spending almost half her income on house payments–a risky proposition for anyone, and especially a person just starting out in a new job. If she ended up disliking her job or the community, she might have had to stay there anyway just to satisfy the mortgage payments.
“I wanted to feel comfortable, knowing I could swing it,” she said, so she decided to wait.
With house prices soaring last year at the fastest rate in 40 years, many renters jumped into a home anyway–afraid a delay would just make a home less affordable later on. Some reasoned that if a house didn’t work out, they would just sell it.
Read more here (with free login).
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15 Responses to “Sure You’re Ready for That?”
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June 28th, 2006 @ 3:35 pm
Great post, Nicole. My family didn’t pressue me to buy too early, but when I did buy they really wanted me to buy more than I thought I could afford.
When getting approved for a mortgage, my mortgage company’s representative actually said in a really affronted voice, “we would NEVER approve you for more than you can afford.”
Oh, really? How come I was approved for a 300K house, then, when I thought it would be a stretch to afford payments on a 120K house?
June 29th, 2006 @ 2:02 am
Claire you are silly. Of course a mortgage company is watching out for you. So are credit card company’s. They really care about you and your future.
Other people who care– check cashing companies, small loan companies, casinos, the lottery commission, and many other “organized criminals”.
Payments sure do come around quick. Don’t stress yourself out by stretching yourself out.
June 29th, 2006 @ 12:04 pm
Fortunetly I still have a few years before I even start really thinking about purchasing a house. The thing that is already worrying me though, is coming up with the $66000 to use for a down payment on a house. (How I got the figure: Average home price in my area 330k, 20% down so I don’t have to pay PMI = 66k). I guess once I am finished college I will pretend I am still in when I have a full time job and save save save!
June 29th, 2006 @ 12:52 pm
One suggestions for you younger people. Don’t buy a house on your first time to purchase. Most likely you will not stay where you are, you’ll get married, transferred, etc.
I recommend buying a condo, townhome or duplex. They are lower in price usually. They generally come with people that take care of the outdoor maintenance – which while you are focusing on your career is difficult to do. And they become a nice rental property for your extra stream of income in your next chapter of life. Don’t worry you can use the equity in this property for a down payment on the next.
Good Luck
June 29th, 2006 @ 12:57 pm
Even not so young people need to be careful before buying. There is this idea now that everyone who makes more than minimum wage should buy a place, even if they have no kids, live alone, or otherwise don’t need the space. Yes, housing prices are rising, but if you can sock away a lot of money by renting, between the saved money and its interest, and the raises you should be getting at your job, your downpayment should be rising faster than housing prices. Therefore in a few years you’d be able to afford a better place more easily than you could right now.
June 29th, 2006 @ 4:28 pm
I dated a mortgage broker for about a year and he was always pushing me to buy, but then he’d turn around and tell me stories about people he got loans for who couldn’t afford the homes they were buying. A lot of them opted to buy instead of rent because they couldn’t afford first/last/deposit on an apartment. But hey…they could get a house with no money down!
I also work at a credit union where we are constantly looking for ways to get people into homes, because the market demands it, not because we’re trying to get them to do something for our benefit. It’s just that the idea of the American Dream has always been homeownership, and even though times have changed and a 1-bedroom converted condo will go for $300k in Seattle, people will do anything for that dream to come true.
June 29th, 2006 @ 5:14 pm
D,
The problem with condos and townhomes is that they don’t appreciate at the rate that single-family homes do. And don’t forget that although exterior maintenance is usually done for you, you’re still paying HOA fees. In terms of future payoff, it would probably be wiser to buy a small house instead of a nice condo. People buying a condo shouldn’t do it for financial reasons.
June 29th, 2006 @ 6:40 pm
Here is how we did it… We figured out what our monthly payment would be, then subtracted rent and automatically saved the difference every month. Our goal was to do this for one year without touching the savings for the latest “must” have. When this goal was reached we then looked for houses.
We were able to save a good deal towards our downpayment during that year…
The first mortgage person that we saw told us that we were “lucky” not to have credit card debt, I looked her dead in the face told her there was no luck involved and walked out.
My advice, have a number in your mind, tell the mortgage person that is the number that you want to be approved for. You can always go up… We even told our real estate agent that we wanted something 50K less then we were willing to spend so when were shown or “reach” home it was well within reason.
In the end no one, NO ONE is your friend in the whole process, you are a cash cow to them and represent a check. The more you spend the more they make!
June 29th, 2006 @ 6:50 pm
Ok, as a loan officer, a lender will be able to approve you for a loan where the monthly payment (all of your monthly debt payments added together) does not exceed 40% of your gross (before tax) income per month. This does not mean that everyone can afford that payment or should borrow that much money. I usually ask people what they’re willing to pay monthly, and then tell them what amount of money that would equate to on various types of mortgages (e.g. 30yr fixed, 5/1 ARM, etc.)
I am not a big fan of $0 money down purchases, but at the same time, don’t feel like you have to have 20% to put down. You can avoid PMI (Primary Mortgage Insurance) by structuring your mortgage with a simultaneous second mortgage (Home Equity Loan or Credit line). Again, make sure you are able to afford the combined monthly payments.
And lastly, don’t forget the tax benefits that owning your own home/condo can provide. Your mortgage interest and property tax are deductible on your tax return. For most people, this will be more than the standard deduction which will then allow you to itemize. In short, you’d be able to deduct any charitable gifts (clothing, furniture, money, etc.) and a variety of other expenses most people don’t think about.
Just my two cents
June 30th, 2006 @ 1:37 pm
Nicole:
Instead of a savings account, why not a Money Market Checking Account, seperate from banks. I used this to keep my money fluid if I needed it, yet distant enough to avoid urges to spend. As an added bonus you can shop for the best rates for these accounts, have it automatically diverted from your checking account at intervals and in amounts you are comfortable with.
June 30th, 2006 @ 1:40 pm
Nicole:
Why not save your money in a Money Market Checking account? You can shop around for the best rates, and still have access to your money if you need it. The access isn’t as easy (like at an ATM). Plus, you can have funds deposited to the account at intervals and in amounts that you are commfortable with.
July 1st, 2006 @ 6:34 pm
Brian couldn’t be more correct when he says that no one is your friend in the entire process. My family and I are going through a sale and purchase right now, and the hyenas have circled from the first day we started the process.
Trusted, knoweldgeable friends and family members are your best source for advice and counsel. Of course, ALWAYS speak with, and follow the advice of, a qualified attorney whenever buying or selling.
Beyond those folks, it seems like this site is a good place to check in for helpful info. I know I’ll be back.
July 4th, 2006 @ 12:22 am
Consider putting the money you are saving for a down payment into a Roth IRA. You can take your contributions out whenever you like and the earnings are tax and penalty free when used towards the purchase of a primary residence. Think about when you might like to purchase and allocate to a suitably conservative investment.
July 4th, 2006 @ 12:27 am
Very good advice. Buying and selling houses is expensive. If you are “lucky” (as one commenter said if you know what you are doing it ain’t luck) you buy in a good location at a good time and get some appreciation. But buy in the wrong location at the wrong time and you lose value. If you want to move that is a problem. With little down you can have negative equity. Therefore the advice on saving for a downpayment and making sure you are where you want to be are all good advice. You can save some of the money tax free in a Roth IRA BTW. The first $10,000 in earnings can be withdrawn tax free to put towards a first time home purchase. I am doing this. I am 41 and have a net worth of $300k but don’t plan on buying till maybe 2009-10 when my net worth wil be larger and house prices lower. I’d probably only feel comfortable buying a house when I could afford to buy with cash
(not that I would because mortage interest is a very cheap loan). OK I am at the extreme… but Nicole’s comments are very sensible IMO.
July 15th, 2006 @ 6:05 am
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