Buying Your Dream Home Without the Stress
I want you to one day own your dream home. I own a home, and it brings so much joy to my life. But I am one of the lucky ones who waited until the time was right and finances were in place.
Achieving a home purchase the right way takes quite a bit of saving and getting finances in order. Yes, I know your lender can get you in a home for very little cash. But where is your lender going to be when you have a credit card bill growing larger by the day that you can’t possibly pay? Where is the lender when your 6 year-old new air conditioner breaks and needs to be replaced? Where is the lender when one ER scare just caused you to hit your $6,000 medical deductible? Where is the lender 30 years later when you don’t have a retirement because you were ‘house poor’ and put all your money into payments and repairs, crowding out the ability for you to fully contribute to the company’s retirement plan? Trust me, the answer to that is: nowhere nearby.
So let me rephrase my opening statement.
I want you to one day own your dream home without stress. Who wants a dream home if it doesn’t come with a happy life along the way?
Here are the no-compromise, absolutely necessary things to have, do, or understand before you sit down to close on your dream home.
A bank account with 3-6 months of spending in an emergency fund (spending needs to include paying the mortgage.)
A bank account with 20% in cash ready to put on the down payment. No, this is not the same account as #1. Don’t spend your emergency fund on a down payment! A home purchase makes your emergency fund MORE important.
An affordable home. I recommend you not spend more than 2x your gross pay on a home or take on a mortgage that is more than 14% of your gross monthly pay. Let’s say you make $100,000 between you and your spouse. Then keep your home less than $200,000. In the second measure, if you make $100,000, then your gross monthly pay is $8,333. 14% of $8,333 is $1,166. So you would not want your house payment (mortgage, insurance and taxes) to be more than $1,166. Want a bigger house? Put more cash down and buy down the mortgage. Want to know how I got this affordability factor? Check out an op ed in the Arkansas Democrat Gazette here where we lay it out.
A home repair reserve. I believe that house payments should include the mortgage, insurance, taxes and a home repair reserve. The most exposed your budget will ever be is to everything that can possibly go wrong in a house. And there are SO MANY THINGS THAT CAN BREAK OR HAPPEN. Without getting into all those, just trust me on this one, and make this calculation. Take 1% of the value of the home, and you need to fund a repair reserve annually with that amount. Take that number, and divide by 12. That is your monthly home repair reserve savings account deposit. For a $200,000 house, 1% of that number divided by 12 is $167 per month.
A mortgage simulation. Ok, so your home is theoretically affordable, but no two financial lives are the same. One family can have 2 car payments, private school tuition, and a family member with Type 1 diabetes that hits the $6,000 medical deductible every year. They will not have the same ability to afford the mortgage (without stress) as another family with paid off cars, public school, and a low, or no, deductible health insurance plan. So how can you know? Simulate it. Get your whole house payment (mortgage, insurance, taxes, and your home repair reserve deposits—sorry Zillow, stop trying to trick people with the mortgage, alone) and subtract what you are currently paying in rent. Put that difference into your soon-to-be home repair reserve each month. Can you live without raiding that account? Great, and want to know the bonus of doing this simulation? That money in savings can now go toward any moving expenses, furniture purchases, remodeling or landscaping. Double win!
A remodeling and furnishing budget. In every single case that I was told “Oh, we are moving into a new house, and we won’t have to do a thing.” or “We are so excited about this house that we can stretch into the mortgage. We have decided not to buy anything new—no furniture or anything.” This has never happened. It sounds good and reasonable but literally has never turned out that way. You will want new furniture. You will want to repaint, retile, landscape or resurface countertops. And if there is no money, no problem. You will finance it, thereby adding to the stress. So knowing that, I want you to put money aside for these things as you are saving for the down payment.
A 10-year commitment. I know that people talk about ‘breaking even’ in a home being 5 years, but that doesn’t account for the significant repairs that happen during that time. Trust me, rent versus buy for a 5 year period will almost every time skew in favor of renting. Can we please ban “starter home” from the English language? It is not a thing. It is just a bad idea. When you buy a home, I want you to buy this home because you love it and will likely continue to love it for at least a decade. People buy starter homes for the very reason that they don’t love the home for the long-term and have a belief that this is better than “throwing money away in rent.” Anyone making that statement is making it out of emotion. I want you to make your decisions on math. Add up everything (mortgage, insurance, taxes, selling costs, remodeling costs, home repair costs) and then put that up against the comparable home rent payment. The latter wins nearly every time. And when something breaks when you rent? Call up the landlord to fix it. A lot of very wealthy people have benefited from renting and controlling those costs in those early years. They never had to worry about a disruption in saving into emergency funds or retirement.
Your home is where you live. It is not an investment. We are seeing the flaw in that argument unfolding. People on the West Coast lived in homes way above their means, and appreciation in those homes certainly benefited their personal net worth. But they lived in those homes at the expense of their retirement funds. In order to retire, these folks are having to sell their homes. But where can they move? Not in their own neighborhoods. Because those houses are equally expensive. To keep the same standard of living would require leaving their friends and families behind and moving to a lower cost-of-living community. Where homes become an investment is when you are living in them to flip them eventually, or buying homes that you rent out. The most conservative place to put your home is in the consumption category. Of course, if you take on a 15 year or 30 year mortgage that corresponds with your retirement date, that is a major benefit. It reduces your cost of living in retirement, which is a considerable bonus. But don’t overvalue the elimination of a mortgage. Retirees will tell you that property taxes, insurance and home repairs still stick around with you in retirement.
Cheers to homeownership and all the memories that can be built in a home, especially a home purchased in the right way.
Photo by Tierra Mallora via Unsplash