17

Currently my spouse and I rent a small apartment. Eventually we'd like to expand the family, and a one bedroom rental won't cut it forever - even if we continue renting we'll be expanding to a detached single family home eventually. In our area the rent ratios work out to about 16, which is under the cut for buying being a better financial decision over the long haul - i. e. I don't think it'd be economically an awful decision to buy (NYT calculator shows 10 years at the current prices and rents for buying to make sense). I've also read enough of the rental propagandists to know that home ownership isn't the best way to grow my money. My reasons for wanting to own are the intangibles: knowing we aren't going to have to move due to a landlord, being able to modify the place to our own liking, and that intangible sense of "this is mine" (even when it's the bank's for a while).

The things we do have:

  • Around (at or over) a 30% down payment depending on purchase price, and we won't be under 30%
  • Closing costs separate from that fund
  • Around 1% of the home value in reserve for emergency repairs separate from those funds
  • A six month emergency fund separate
  • A fund to replace an ailing car that will probably die before we can save up after this expense

At some point in the year or so after the purchase we plan to have enough saved up to pay down the principal and change our monthly payment somewhat, but not significantly.

So it seems like we've got the financial ducks in a row. We can continue to fully fund our retirement accounts and make the monthly payments (PITI). The only hesitation we have is that we can't make our payments comfortably on one income alone - it'd be over 30% of one income to do so, by just a bit. So neither of us can completely stop working, although the second income does not need to be large.

Are we missing any important financial data about this step? Should we be concerned about job loss (even though no signs of it are imminent for either of us)?

8

Do you want a house? Sounds like you do. Did you think about what it will take to own a run a house? I am betting you have. Buying a home shouldn't be about an investment in anything other than you happiness and you sure seem conscientious and ready.

Your worries are good ones, but don't forget about unemployment insurance, that as responsible people you can get another job. Do you have a life insurance policy? If you really really can't afford your payments, you can try to sell the house because you should have plenty of equity per your plans.

Furthermore, chances are you will earn more in your paychecks over your lifetime.

Think about what features you want, shop the market hard, take time and buy a house on reason rather than love. Don't you dare love the house until you buy it.

  • 1
    why "Don't...dare love the house until you buy it" exactly? I'm interested. – justkt Sep 26 '10 at 0:49
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    You shouldn't make the decision to buy a home on anything other than reason and math. If you love a house before you buy it, you might be tempted to make rash decisions about how much to pay or finance. – MrChrister Sep 26 '10 at 1:47
  • I would slightly disagree with using only math and reason; if this were true, then no one should buy a house, since math always favors renting. If you don't believe me, wait until you have to replace a roof at the cost of $50k. You buy a property because you want (more) control over your living situation than you would if you rent. The risks of owning are significantly higher than renting and risks rarely get factored into decisions because they're hard to quantify. One risk to avoid is a mortgage, so put as large a downpayment as possible and pay the mortgage off as soon as possible. – rocketman Aug 13 '17 at 20:56
6

You sound like you're in enviable shape. This is good.

Look for deals. There are tons of people in over their heads (unlike yourself) and they'll be foreclosed on if they don't get out. You're in a position to buy from a distressed seller. Assuming your credit rating is good, you can get a good loan for the balance.

Time is on your side. Don't rush. Look for a great deal. My feeling is that the deals will only get better for the next year or two.

  • For first time buyers, shop for a real estate agent as aggressively as you shop for a home. A good agent will be on your side and take time to help you understand what to look for. If you don't trust the agent, don't deal. – MrChrister Sep 26 '10 at 0:01
  • @MrChrister - thankfully we have an amazing agent via the recommendations of several (not just one or two) friends for the same guy who has gotten some amazing deals and knows when someone's covering up a lemon. – justkt Sep 26 '10 at 0:49
3

It sounds like you are in great shape, congratulations!

Things I would think about in your position:

Consider putting 20% down instead of 30% and find a great house that has a key missing modernization, like a kitchen. Then replace the kitchen, which if done right can instantly add that 10% (or more) right back in equity... or stick to your plan... You have earned the luxury of taking your time and doing what's right for you.

Think real carefully about location. Here are some ideas based on my experience.

  • In a place like New York where crazy real estate taxes rule, selecting the right county, city/town and school district is a huge factor that will affect the value of your home? Why? Escalating taxes reduce your net income and hurt the borrowing power of a future buyer.
  • If you're in a high-property tax state, watch the assessment used to calculate the tax estimate you are given. New homeowners run into higher than expected taxes.
  • In the south or other places that have "unincorporated" areas, look for issues that could spike your HOA fees. Is there a contract that requires houses in your development to hook up to city/county water/sewer in a few years?
  • Look at terrain and surrounding properties. Is there a big inactive farm nearby that will turn into a giant subdivision, factory, strip mall, etc? Is there city/town owned land that will turn into a school, police station, sewer plant?
  • Always buy on a hill. Bottom of a hill == water in your basement someday. Do surrounding houses have all sorts of crazy gutter extensions? That's an indicator of wet basements.
  • If the property you're looking at is anything but a standard subdivision/city lot, get a paid survey done of the land before you buy.
  • People spend alot of time looking for real estate agents, but not lawyers. Find a good lawyer, who is familiar with the local situation in the place you are buying the house. Don't accept referrals from anyone associated with your broker. The broker, no matter how wonderful he or she is, has one vested interest: close the deal. The lawyer is your real representative.
  • 2
    from what I've seen on a graph of how much equity things add to your house, you have to get some really great deals and be awesome at DIY to actually get back from most renovations what you put in dollar for dollar (it's usually only around 75%). I'd be interested to see your data, though! The reason for the 30% down is to get the monthly payment down as close to what can be supported by a single salary as possible so that one of us can at least go part time with possible future kids. – justkt Sep 27 '10 at 12:38
  • @justkt: It depends on the state of things before and how you do it. If you just hire some contractor, you're not going to make any money. If you do alot of the "dumb labor" yourself and bring in tradespeople for the work that requires more skill, you'll easily recoup that investment. The only reason that I suggested it is that you can drive a real bargain on the house with the lime green 70s kitchen and potentially hit the monthly payment goal that you're looking at! – duffbeer703 Sep 27 '10 at 15:13
  • unfortunately we live in a location where land value is literally 4/5ths of the price of a home, so a lime green 70s kitchen usually doesn't bring a home down significantly, but for most buyers an old kitchen or a deck that needs repair is just the ticket. I'm glad for them! – justkt Sep 27 '10 at 15:15
1

Another factor not mentioned are the rent prices in the area you are looking to live. I'd recommend buying a house of which the total monthly costs (mortgage, insurance, repairs, etc) are equal to or less than renting a house in the same area. If you can't find a property for sale that meets this requirement, you might actually be better off keep on renting, at least for a while, because you risk paying too much for your living expenses.

A second point is, if possible, to buy when the mortgage interest rates are low, and then go for a mortgage with fixed interest and fixed repayments. While such a mortgage will be more more expensive than one with variable interest, and house prices are higher when mortgage rates are lower, future inflation is almost a certainty. And if your interest rate was fixed, and you are confident that you'll be able to negotiate salary raises in pace with the inflation, then inflation will gradually whittle down the rate between the mortgage payment and your income. Conversely, if interest rates are historically high, with no lowering in sight, then a variable loan might be more interesting.

And do shop around for mortgages, there are many banks out there, the competition between them is heavy, and many banks, especially the smaller banks, will often be willing to give you a mortgage at better conditions than their competitors.

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