It has been a LONG time since I’ve done a financial post. If you’re new, you can read about our financial freedom HERE or HERE. I have gotten a few emails, from young couples especially, asking about purchasing a house.
We I have been thinking about a new house in the near future so “house buying” has been on my mind. I’m sure I’ve mentioned these here and there, but I thought of THREE important things Ryan did BEFORE purchasing our house (I moved in once we married…he bought it and proposed in it).
I am not a financial advisor or a real estate guru…just a wife to a smart guy when it comes to personal finances. These 3 things helped us ESTABLISH a great start to paying off our house in 33 months. These 3 tips are not the end all be all, and everyone’s situation is different.
Just a quick recap, our house was $150,000. We paid $40,000 down, so our loan was $110,000! Here are 3 things I suggest if you’re in the market for a house.
1. Look for and buy a house you can afford – This is probably the toughest tip to follow through with. Really calculate how much you and your family can afford. A good rule of thumb is, your mortgage should NOT be more than twice your household’s total annual income. For example, if your household income is $80,000, your loan should not be more than $160,000. Of course, this a general rule, but the point is, your mortgage should be lower than you think it would be (definitely lower than what most Americans buy). This is from Stanley and Danko’s book, The Millionaire Next Door. And also remember taxes, HOA’s, etc. when calculating your mortgage. I like to use Dave Ramsey’s mortgage calculator to play around with numbers.
If you do want a specific house within a specific price range, but cannot afford it, WAIT and buy it when you can (obviously this is for those not HAVING to move at a certain time). This is what we’re currently doing. We will most likely move only once into our forever home (at least where we want the kids to be raised) when we are making enough money and have the appropriate monthly income since we will take on a mortgage again. I REALLY want to move right now, but I know if we are patient, our future will thank us.
2. Put down a large down payment – So this isn’t a must, but it sure does help. The more you put down, the less you have to pay…duh! 🙂 Put down at least 20% to avoid PMI (private mortgage insurance). PMI can be $100-400 more a month, so this is helpful. It took my husband a lot of time and basketball games to save up the $40,000 for our house (he was a minor league baseball player, substitute teacher, and basketball ref). We put down 26%. It’s much easier to say good-bye to it when you just bought your house and are super giddy vs. each month when the bills come.
3. Choose a 15 year note. You can read my detailed post about this HERE, but bottom line, this will save you thousands people!!!! This is one tip I just don’t understand people not taking advantage of. Okay, I understand it, but it’s something I really think is beneficial if you’re looking to save THOUSANDS of dollars on wasted interest. I get that interest is kind of a “have to” when buying a house, but we tried to eliminate as much as possible. For us, the difference between a 15 and 30 year note was $200-400 a month. By the way our mortgage was $900/month with almost $400 in taxes and that’s WITH A 15 YEAR MORTGAGE. Would have been even cheaper for a 30 year note. But we are now going on 5 years without a mortgage, which has freed up the possibility for me to stay home while also investing in our future. Even if we hadn’t paid it off in 33 months, we would only have 7 years left. I’m almost 30 so that still would have been young to have a house paid for at 36.
I hope these tips helped anyone looking to buy a home. If you’re already in a house with a 30 year mortgage that it too expensive (even if you can afford it), you can always:
–Refinance (ONLY if the interest rate is tons lower…you just have to compare the rates from when you bought the house).
–Put more down on your house each month by reallocating your budget.
–Move. Obviously this is in extreme cases where the buyer bought way over their head.
HERE are a few more tips from Dave Ramsey on Home Buying.