August 10th, 2016 6:11 AM by Jackie A. Graves
years ago, my wife and I were in a bit of a personal bind. We lived together in
what was about the tiniest two-bedroom apartment you can imagine, with a small
baby and another one on the way. We were already forced into being pretty
creative with arrangements with even one baby in the home, but two? It was
pretty clear that we needed a bigger place.
We considered a bigger apartment, but there were honestly none
available that were even remotely reasonably priced in the location that we
wanted (roughly midway between our two jobs), and my wife
didn’t want to live in the city near either of our jobs. With that, we started
house hunting. And, to be honest, we somehow managed to stumble into a pretty
good house for our needs at a fairly reasonable price.
Looking back, however, I recognize that we were able to find
that house due to pure, unadulterated luck. We did many things
wrong during our house search, our move, and our early days of home ownership.
If I somehow had it to do all over again, I would have made some
smarter decisions and considered some things that I didn’t pay any attention
to. But, unfortunately, I don’t have a time machine.
Instead, here are the 12 things I most regret not considering or
doing during the whole process of moving from an apartment to a house. Perhaps
they’ll find their way to someone in the same situation I was in 10 years ago.
It is really easy to get caught up in the glow of all of the
potential benefits of home ownership. You can build equity! You don’t have a
landlord skulking around! Once you pay off that mortgage, you won’t have any
kind of monthly payment any more (well, you’ll still have property taxes and
association fees and insurance…)! You can do whatever you want with the
property–if you want to knock out a wall, go for it! If you want a fuchsia
room, go for it!
The thing is, there are actually a lot of benefits to living in
an apartment that people tend to overlook due to a “grass is greener on the
other side” effect.
For starters, when you live in an apartment, you don’t have to
do maintenance on the property. If something goes wrong, call the landlord. If
it’s your house, you’re either going to be fixing it yourself or calling a
repairperson and, in either case, you’re going to be spending money on parts
(at the very least) and labor (if you bring in help).
For another, rental insurance is far cheaper than homeowners insurance on even the cheapest of properties,
and you don’t have things like property taxes or association fees, either.
For another, tasks like mowing the lawn and cutting weeds and
trimming trees aren’t even on your radar. They’re just taken care of. You don’t
have to spend the time on those tasks or pay for the equipment required. Those
things all mean expenses when you’re living in a home, expenses that people
often don’t look at when they compare a mortgage to apartment rent.
Before you ever consider buying, you really should
spend some serious time looking at a good “rent versus buy” calculator, like this one from the New York Times.
You need to run the numbers over and over and over again and
make absolutely sure that the financial benefits you’re getting from buying a
home are greater than the financial benefits you’re getting from renting.
Looking at the raw numbers removes the emotions and the “grass is greener”
factor from the picture.
If you don’t have a 20% down payment, you are going to wind up
handing a lot of money to the bank to make up for it.
Here’s the reality of the situation: If you come to a bank
without 20% of the cost of the home you want to buy already in hand, the bank
is going to see you as a risk, as someone not serious about buying a home, as
someone who might dump a house on them after not making many payments which
leaves them swallowing almost the full cost of the house if they have to
What the bank will do is not give you a loan unless you sign up
for mortgage insurance. Mortgage insurance will amount to about 1% of the total
balance of the mortgage each year; it will be tacked on to your mortgage
payment. You can essentially think of mortgage insurance as adding a +1 to
whatever the interest rate is on your loan–if it’s a 3.5% loan, you’ll
effectively be paying a 4.5% interest rate.
That mortgage insurance is going to stick around until your
remaining principal on the loan is less than 80% of the value of the home–and
the bank won’t exactly be friendly about this, because they won’t let you
remove the interest rate until they’re absolutely sure it’s less than 80% of the lowest
possible value of your home.
Why do they do this? It’s insurance for them against a
homeowner–you–who might not necessarily follow through on the mortgage. Why
would they think that about you? It’s because you tried to borrow a lot of
money without bringing much of your own to the table, as demonstrated by not
having that 20% down payment.
So, the real impact of not having a 20% down payment is that for
the first, say, third of the time you’re paying off the mortgage, you’re going
to be effectively tacking on an additional payment each month, one that will
add up to 1% of the value of the home over the course of a year. If you’re
buying a $250,000 home, that means your mortgage insurance will cost you $2,500
a year until you get rid of it. It’s just gone–poof.
You can avoid this entirely by just saving up a 20% down
payment, which you can do by being a little bit smart with your money. That’s
actually really good practice for the realities of home ownership, because to
be able to make home ownership a success, you need to be smart with your money.
Home ownership is very rewarding, but there are a lot of costs involved, and if
you’re spending money without much organization, simply learning how to save
and make better choices with your money is vital preparation for home ownership
and that 20% down payment savings project is a great way to learn.
This is something you likely already understand, but I’m putting
it here to re-emphasize it. Location. Is. Very. Important.
Wherever you decide to live, you’re going to be commuting from
that place to wherever it is that you work. That commute is going to have a
cost in the form of both money and time, a cost that is going to be repeated
over and over and over again as long as you have that job (and, likely, jobs
similar to that one which will probably be in the same area).
If you live close to that area, great! You can walk to work or
take a bike to work, which means your commuting costs are practically zero.
If you’re a bit further away, you can probably take the bus to
work or the subway. You’ll have to pay some mass transit fees, but it’s still
pretty cheap in the big scheme of things.
If you’re far away from work, you’re probably buying a car. A
car is expensive. The AAA estimates that the average annual cost of owning a
car, including all of the expenses (fuel, maintenance, registration, insurance,
parking, depreciation, etc.), is $8,698 a year. Ouch.
If you pick a poor location, your commute cost goes up from $0
per year to $8,698 per year. That’s effectively tacking $700 a month onto your
monthly housing expenses–and we’re not even talking about the time eaten
each and every day.
This isn’t to say that this should be a deal breaker, but that
it should be part of your math when figuring out whether to move.
Sarah and I did shop around on a very limited basis for a
mortgage, but our “shopping around” mostly consisted of looking at a few
advertised mortgage rates and then quickly selecting a single financial
institution to work with.
What we should have done is actually meet with several different
banks to discuss mortgage options and see what kind of mortgage offers they
were willing to pre-approve for us.
Pre-approval is important. It gives you a dollar amount with
which you can safely house hunt without having to go back and get approved.
It’s effectively your budget for the house hunt.
It takes some time, but spend that time now. It will pay off
enormously for you if you are able to find a bank that will shave 0.25% off of
your interest rate while pre-approving you. Just getting that little amount is
worth many, many hours of bank meetings.
When you’re in the process of house hunting, it’s very easy to
get blown away by the bigger homes with nicer decor and furnishings. They look
good. They’re roomy. They shine in comparison to smaller homes with lower
The thing is, you’re paying for that extra space. You’re paying
for those nicer elements. You’re paying a lot, in fact.
My advice? It’s similar to my advice when shopping for anything.
Start at the bottom and inch your way up. Don’t start by looking at homes at
the high end of your preapproval. Start by looking at a bunch of homes at the
low end and see if any stand out to you for your needs.
Then, very slowly start lifting the ceiling on your price and
looking at more expensive homes if you don’t find anything that really stands out
If you start, as we did, by looking at homes that are on the
very upper end of your price range (or even out of your price range), you’ll
find yourself naturally predisposed against lower-priced homes. Your basis for
comparison becomes that expensive, gorgeous home that’s going to be like a
financial weight around your ankle, a home that doesn’t represent the best bang
for the buck for you (which is what you’re really looking for).
Start cheap. Look at cheap homes, then inch upward. You’ll know
a good home for you when you see it.
Over the course of a 15-year mortgage, you’re going to end up
paying about a third of the interest to the bank that you would pay over the course
of a 30-year mortgage. That’s because not only is a 15-year mortgage much
shorter in length (meaning you’re paying more principal each month), it also
comes with a lower interest rate.
If that tip is true, why do people get a 30-year mortgage, ever?
The reason’s simple: 30-year mortgages virtually always have a lower monthly
payment. Even though it’s a poor long-term choice, people often look at the
bigger 15-year payment and back away, believing that they’re not going to be
able to afford it.
Here’s the truth: If you’re scared of the monthly payment of a
15-year mortgage, then a 30-year mortgage for the same amount is probably also
a poor idea. It means that you’re buying more house than you can really afford.
Unless you have some sort of incredibly compelling and unusual reason for
preferring a 30-year mortgage, you should be getting a 15-year mortgage. If it
looks like you can’t afford the payments on the 15-year mortgage, then you need
to be looking at a lower-priced property to buy.
We got a 30-year mortgage. We managed to pay it off in four and
a half years (because we were making triple and quadruple and quintuple
payments to try to become debt free). If we had a 15-year mortgage, we would
have paid the whole thing off even faster, with even less mortgage given to the
This is a good rule of thumb for financial sanity. Take your
monthly debt payments for your already existing debts. Add to that your monthly
mortgage payment for a 15-year mortgage. If that adds up to more than 40% of
your monthly take-home pay, then you’re putting yourself on a very dangerous
financial tightrope and you should strongly reconsider buying that home.
This is an example of a foolish move that we almost made, except
that we were directly saved from this by a loan officer at the credit union we
were working with. The number one figure she worked with in terms of
determining our preapproval was our monthly budget and she would not allow us
to go above a 40% total debt payment. She preapproved us only for an amount
that translated into a loan that was below that 40% threshold.
Without that careful loan officer, we could have found ourselves
in a serious mess, as we had been willing to borrow more for a bigger house. We
had our eye on a home that was almost $50,000 more than what we were
preapproved for; buying that home would have been a giant mistake.
Keep your debt payments below 40% of your take home pay. If you
can’t do that and also get the house you want, keep saving or turn your sights
One potential avenue of home ownership that Sarah and I
discussed was the idea of “flipping” a house. This was during a period where
the concept of “flipping” a house–buying it, putting some work into it, then
selling it for a profit–was very much in vogue.
It can be a moneymaker, for sure, but it’s also a very big time
sink. You are going to be putting a lot of hours into such a project if you
take it on, and if the house you’re flipping is also your primary residence
during the process, you’re adding even more challenge to the equation.
My later experience with house renovation and flipping taught me
a simple lesson: it
can go well and be profitable if you know what you’re doing and have some good
carpentry and handyman skills. If you’re lacking those, it’s not
going to go well–you’re going to vastly increase your invested hours and vastly
cut back on your profits.
In the months prior to your move, don’t just throw everything
into a down payment or into closing costs. Keep some aside for the inevitable
bundle of expenses that you’re going to discover when you move in.
You’re going to find that you need lots of things, particularly
items that were previously provided by your landlord. You’ll need a mower (or a
mowing service). You’ll need lots of various tools. You’ll probably need some
furniture–even if you buy super low-end stuff, you’ll still need some.
You may need appliances. You may need little things for minor home repairs. You
may need food and beverages for the people who help you move and settle in.
Those costs are going to add up, no matter how you slice it.
It’s a bad move to start off your new period of home ownership with a lot of
credit card debt.
So, during those last few months in the apartment, direct some
of your savings to be used for those expenses when you first move in. You’ll be
incredibly glad you did, because if you don’t, your credit card will melt.
Your first home will probably be substantially larger than your
apartment and you’ll find that, when you move in, some of the rooms are
awfully... sparse. It will be very tempting to go fill them up with
furnishings, particularly places to sit.
There’s nothing wrong with that temptation. Just do it smartly.
I highly recommend starting with very low-end furnishings, even
secondhand stuff, to fill spaces in your rooms. This will enable you to
eliminate that “empty” feeling as inexpensively as humanly possible.
Then, after that, slowly upgrade the furnishings as you see fit
and as necessary. If you do it slowly, you can do it out of pocket, without the
added expense of credit card interest and without putting your emergency fund
or other savings at risk.
Once you’ve settled in just a little and have purchased a few
true essentials for your home–basic furnishings and such–adopt a “one in, one
out” policy for everything in your home. If you bring in an object of some
type, you need to get rid of an object of the same type by selling it.
If you bring in some clothing, you have to get rid of some
clothing. If you bring in a book, you have to sell a book. If you bring in a
gadget, you have to get rid of a gadget.
Seem strict? Well, the problem is that if you don’t do
this, you’ll rather quickly fill up all of the additional space in this home
and you’ll be just as cluttered as you were before you moved. You’ll also find
yourself in a position where it is much more difficult to move, to rearrange
things, and to nave a non-cluttered home, and you’ll be spending lots of time
on maintaining your stuff and finding individual things you need.
Another big benefit of such a policy is that it keeps money in
your pocket. You’ll become very selective with the things that you buy. You’ll
spend less overall, and when you do spend money, it will be for quality
upgrades, not just mass quantities of stuff.
Keep things simple. Stick with a one in, one out policy. I
certainly wish we had done so.
This is a final, but powerful tip for any new homeowner. Get to
know all of the people in your neighborhood–at least within several houses of
your own. Stop by if you see them outside and introduce yourself. Once you’re
settled in, invite some of them over for a cookout in the back yard. Built at
least a minor positive relationship with them.
How is this beneficial? A neighbor is a person who can lend a
helping hand in a pinch. You can borrow things from them when needed. They can
keep an eye on your house when you’re traveling. They can be a friendly face
and a conversation partner at home and can even become a close friend. Of
course, you’ll reciprocate these things, but the cost for you is much lower
than the value of the benefit you receive.
Your neighbors are a lending library, a source for advice, an
intruder alarm, a package retrieval aid, an emergency babysitter, a potential
lifelong friend, and so much more. Don’t let that slip by just because of your
own busy schedule.
In various ways, we bungled almost all of these strategies while
purchasing, moving into, and settling into our current home. They weren’t
conscious mistakes, just errors made because we didn’t yet know what we were
After years as a homeowner, I’ve managed to overcome and fix
some of these things. We eventually built good relationships with our
neighbors. Our house is cluttered, but we have a “one in, one out” system
that’s largely in place now. Our house is wholly paid for (though we could have
paid for it much sooner).
If I had it to do all over again, though, I wouldn’t try to fix
these things afterwards. I’d try to do them right from the start. I hope you’ll
do the same.
By Trent Hamm - To view the
original article click here