So I recently read this great article by Trent at The Simple Dollar…
Simple Dollar: Four Atypical Things to Do Before Buying a House
…and it made me think about all the things I hear people around me say — people who are either house-shopping, or who recently bought their first home — that sort of pointed toward a, uh, less-than-dreamy home-ownership experience for them.
Ah yes. I can hear them all now …
“We can afford it. The house payment is barely more than our rent.”
Think your current rent payments are equivalent to the monthly payment of a mortgage? If so, think again.
This is because the costs of owning a home aren’t limited to your mortgage payment. Leaking roofs, lawn maintenance, broken windows, higher utility bills, plumbing woes, crapped-out central A/C systems, and an endless array of other “You’re on the hook now!” money drainers are always on the playbill for Joe and Jane Homeowner.
And many times, the prices of such “homeowner incidentals” easily reach into the four-digit realm to fix.
Because such expenses are essentially guaranteed when you’re a homeowner, and because they’d never be a consideration if you were a renter, it is downright deadly to equate rent payments and mortgage payments.
Yet, like car buyers, potential homebuyers (especially young adults) tend to see everything in terms of monthly payments rather than total cost. “Payments” are simple, and hide a whole lot of things. There’s a reason the lending world wants you to focus on payments.
“Cost,” however, is expansive. It includes all items stated, incidental, and accrued.
Ignoring “cost” because it tells you something you don’t want to hear, in favor of “payment,” because it’s nice and cozy and your banker tells you you can afford it?
That’s a fantastic way to end up broke and on stage with Dr. Phil.
“What if we don’t have any money for a down payment?”
Then you shouldn’t be buying a house.
Anyone who tells you otherwise (1) is doing you a major disservice, and (2) probably has a paycheck that’s dependent on your buying decision.
If you can’t come up with at least 3.5 percent down (the bare-assed minimum to qualify for an FHA loan these days), then you’ve made one thing perfectly clear: You have no control over your spending or your money. You haven’t shown any ability to plan for the future and the unknowns it will send your way.
Having no savings for a down payment shows that you have no respect for risk. (Or no financial ability to acknowledge it. Either way, you’re not qualified for home ownership.)
Remember the four-digit “unexpected” expenses I mentioned above? They’ll happen. They’ll happen at the worst possible times. They’ll have to be paid for.
“It’s time to buy. Our agent says prices have bottomed.”
The day potential homebuyers stop thinking of houses as a can’t-miss investment, just waiting to be snapped up at the bottom tick, is a day I’ll cherish. Until homes become a place to live again, rather than a no-risk-perceived lotto ticket to retirement cash, then the housing market will continue to deliver misery to a great many people.
“It’s time to buy. My wife and I really need a tax break.”
Ah yes, the old tax-deductibility hook, adored by real-estate agents and mortgage brokers alike.
I’m pretty good with Excel, but somehow I still can’t make it show me how this is a path to riches: Send $100 to the bank (interest) so you don’t have to send $30 to the IRS (taxes).
Maybe there’s a function I’m missing somewhere. Yeah, that’s probably it.
“Yes, the payment seems high. But our agent said we would grow into it.”
Back when Lisa and I were buying our home (our first, and still current, home), I had several people tell me not to be afraid of “stretching” to get into a “starter” home. My memory’s foggy, but I bet I heard it from our real-estate agent, too. Tough to recall.
However, even at the tender age of 25, Lisa and I understood one thing: Just because the bank was willing to loan us $110k, that had no bearing on whether we could afford — or should even consider purchasing — a $110k house. In fact, we ended up purchasing a ~$65k house.
Assuming we stay here, this house will be paid off by the time our kid hits high school.
In Summary: Trent Nailed It
Here’s the point where, for my money, Trent’s message is absolutely spot-on. He runs through a handful of reasons people give for why it will be “different” (always in a good way) once they buy a house:
“Our lifestyle will be different when we own a house.” In what way? The only major change will be that you have less spending money and, most likely, more room to store stuff.
Such statements are merely ways to pass the buck on to your future self, the responsible one who owns a house and makes more money and makes all of the payments. If that person doesn’t exist now, merely owning a house won’t make that person exist in the future. Don’t ever base your plans on what you hope might happen someday.
Take responsiblity now. See whether or not you actually can make it work in terms of your month-over-month finances. If you can’t do it now, then you won’t be able to do it then.
I could not agree more strongly. If you can’t do it now, you won’t be able to do it then.
If you couldn’t save money while you were renting, you won’t save money once you’re a homeowner. There will simply be too many opportunities for money to drift out of your grasp. Having no ability to save before you make the leap to home ownership, even if it’s just a few percent of the purchase price, means you’ll be placing yourself in a terribly perilous position.
Betting that you can handle it all because of a better future “financial self” is precisely what you must not do. Because it’s quite likely that the total cost of home ownership itself is what will consistently drag your financial future lower.