M is for Money

This is Part 2 of The First Time Homebuyer, for Part 1

Why do you want to own a home? Is it for a sense of place, a feeling of security or the ability to paint the walls something other than white? It’s easy to fall in love with the idea of owning a home, but the reality is far different. Any first time buyer needs to take a serious look at their motivations for owning a home before they commit to buying one. Even more important, are you ready to own a home?

Financial Commitment

Owning a home is the biggest financial commitment you’ll ever make (well besides marriage and kids). You are committing to make a large payment every single month for the next 30 years. If your income is unsteady or your employment uncertain, buying a house is a serious mistake. It’s not easy to walk away from a home and failing to pay your mortgage will have big consequences for your credit and your wallet. Depending on your lifestyle and career, you may be better off renting.

Buying a house comes after putting your financial house in order – paying off debt and building up an emergency fund. Existing debt will reduce the amount of house you can afford and stretch your budget thin. An emergency fund is even more crucial to homeowners, urgent house repairs can appear out of nowhere.

When you take on a mortgage you will pay as much in interest as principal. A $200,000 mortgage at 5.5% for 30 years will cost you $209,000 in interest. You will pay over $400,000 for that $200,000 loan. Does the house still seem worth it at twice the price?

Problems and More Problems

There is a reason houses are called money pits. Houses require upkeep, maintenance and repairs. Over time systems have to be replaced and tired interiors need to be renovated. The list of work that my house needs would run on for pages. How much do you know about painting, plumbing, and electrical? Are you handy with a wrench? There is no manager you can call. You are the manager and responsible for fixing your own problems.

If you are motivated and have a few tools you can do many repairs yourself. I hope you like Home Depot cause you’re going to be spending a lot of time there. Problems can also be solved with money, which you are going to need plenty of. Replacing a roof, painting the exterior or installing new wiring will run thousands of dollars. The cost of repairs is one thing that new homeowners severely underestimate. Some people can’t stand problems, if you are one of them, don’t buy a house.

Stuck in One Place

Do you like where you live, do you plan to stay for the next 10 to 20 years? Buying a house means throwing down roots in a community, which is a wonderful thing. But if your dream is to move back closer to family in a few years, buying a house in your current town is a mistake. The on-going collapse of the housing market illustrates why you should be ready and willing to stay in one place for decades - many underwater homeowners bought their houses 6 or 7 years ago. It will be many more years before prices recover, meaning they must stay in one place 10-15 years just to break even on their purchase. Anyone contemplating buying a home should realize they may be stuck with it for a long time. Even in a normal housing market it takes 3-4 years of ownership for you just to recoup the transaction costs.

Are You Ready?

I wasn’t ready to be a homeowner when I bought my place. I didn’t understand what it entailed - the high cost, the huge responsibility or the feeling of being trapped. There are things I enjoy about my house, but I often feel I should have rented for a few more years.

It’s OK if you’re not ready to buy, there is no timetable that says you have to buy a house by a certain point. In this case, it’s better to be over prepared. If you’re still committed to buying and I haven’t changed your mind, stay tuned. Next time I’ll discuss the financial preparations you need to do to before you buy – good stuff even for those not yet in the market.

Part 3 - Get Your Finances in Order

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