We’ve probably bought and sold more houses than the average person. We are on our 9th house – and these have all been a primary residence – no vacation homes. Sometimes it was a job related move because we were transferred to a different city. Sometimes we just wanted a bigger house (before we got smart) and sometimes we downsized (after we got smart).
In all that moving around, we learned several tips which we are going to share with you.
But first, let’s start with a verse from Proverbs 24:3 “By wisdom a house is built, by understanding it is established; and by knowledge its rooms are filled with every precious and pleasing possession.” These thoughts of understanding, wisdom and knowledge sum up the things you need to consider as you buy a house.
The first big step in buying a house is to determine if it’s even a good idea. Do a cost comparison on renting vs buying to determine which is better for you. It is really easy to get caught up in the glow of all of the potential benefits of home ownership; equity, no landlord, doing whatever you want to the property.
At the same time, people tend to overlook the benefits of apartment living. 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 you own the house, you have to pay for the repairs to be done, or do them yourself. Rental insurance is far cheaper than home owner’s insurance on even the least expensive home. If you are renting, you don’t have things like property taxes or association fees. Renting also means you don’t have to spend weekends mowing the lawn, pulling weeds and trimming trees.
A deciding factor in rent vs buy is the permanence of your location. What’s the chance you will be moving in a year? 5 years? Ten years? You need to be in a home at least 5 years to make buying a better choice.
Several websites will help you calculate the difference between renting and buying: Realtor.com; New York Times; Bankrate.com. Or, just google rent vs buy and millions of articles will be at your fingertips.
Calculate the numbers related to rent vs buy from several different websites 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.
Keep in mind that there is a huge grey area in the rent vs buy decision based on emotion. That is why it is so important to have facts and figures to use in your decision making process. Buying a home can be a good decision for many people and a very bad one for others. Calculating the raw numbers removes the emotions before you look at a house and fall in love with the backyard.
If buying still seems like the best choice, decide how much house you can afford. In our Navigating Your Finances God’s Way Bible studies, we encourage people to keep their housing costs at 40% of net spendable income. So, take your gross income (before taxes), subtract all the usual payroll deductions and your weekly giving to church and you’ll have your net spendable income. That 40% for housing costs includes not only the mortgage payment, but all the costs associated with owning a house; prepayment of mortgage principal; property tax; homeowner’s insurance; flood insurance; electricity; lawn care/gardening; gas (as a utility); water; sanitation; home maintenance; furniture; appliances; TV (cable, satellite or on demand service); internet service; pool maintenance and supplies; extended service warranties; pest and termite control; homeowner association dues, etc.
If all of those items add up to more than 40% of your monthly net spendable income, then you’re putting yourself in a very dangerous financial position.
Before you even start looking at houses with a realtor, get preapproved for a mortgage. Be sure to talk to several banks and lending institutions before deciding on which to work with. If your preapproval is based on capping your housing costs at 40% of net spendable income, you will have a natural stopping point and you won’t find yourself in a serious mess by buying more house than you can afford.
Avoid the need for private mortgage insurance by saving up for a 20% down payment. That’s actually really good practice for the realities of home ownership, because you need to be smart with your money to be successful in managing a household budget.
Typical cost for private mortgage insurance is 1% of the total balance of the mortgage each year, which is included in your mortgage payment. Basically, mortgage insurance is like 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% which includes both interest on the loan and mortgage insurance.
Decide in a rational way what kind of house you really NEED (not want). How many bedrooms or bathrooms do you really need? Once you start looking at houses, it is very easy to get caught up in the excitement of house hunting and fall in love with a house that far exceeds what you really need.
Start your home search by looking at homes at the low end of your budget. If you start out looking at homes at the high end of your budget, the less expensive homes will never satisfy you. If you have to move to a higher budget level, proceed with extreme caution.
The most important part of home buying is a decision on location. You can change lots of things about a house but you cannot change the location. Consider proximity to schools; shopping; church and especially your commute to work. If you pick a location with a long commute, your costs increase and you are wasting time driving back and forth.
Even though it’s a poor long-term financial decision, people most often choose a 30-year mortgage since it has a lower monthly payment than a 15-year mortgage. But that lower monthly payment means you are paying exponentially more in the long term, which is definitely not a wise financial choice.
A 15-year mortgage will save you about 2/3 of the interest you would pay on a 30-year mortgage. That’s because a 15-year mortgage usually comes with a lower interest rate. Plus, interest on a mortgage is calculated based on the outstanding balance and on a 15-year mortgage, the balance decreases faster since the payment is larger.
After you’ve spent a ton of money on your down payment and closing costs, there is more to spend when you move in. If you are moving from an apartment, you’ll need things you probably don’t have like a lawnmower, tools or appliances. Whether you are moving from an apartment to a house or from one house to another, you are bound to want some stuff like furniture, window coverings, paint, and décor.
Those costs are going to add up, and it is NOT a good idea to start home ownership with a lot of credit card debt. So, during those last few months before moving, save, save, save so you will be able to pay cash for all those expenses that hit when you first move in. You’ll be incredibly glad you had a savings cushion, otherwise it is very easy to max out your credit card.
Anything that makes the new place feel like home will be on the list of things you’ll want to buy. There’s nothing wrong with that temptation. Just do it smartly. Waiting to buy stuff until you live in your home for a few months helps you understand how the house will live and you’ll make better choices than if you run out and try to buy everything all at once as soon as you move in.
There is also that credit card debt to consider. Until you get used to the new budget of homeownership, keep all your non-essential living expenses as low as possible to avoid digging a financial hole. If you can pay cash for non-essentials you will avoid the added expense of paying credit card interest and you won’t be tempted to use your emergency fund or long term savings for non-essentials.
We’ve learned these tips as we have bought and sold houses in various locations and one of the most meaningful things we learned is from Matthew 7:24-27, “Everyone who listens to these words of mine and acts on them will be like a wise man who built his house on rock. The rain fell, the floods came, and the winds blew and buffeted the house. But it did not collapse; it had been set solidly on rock. And everyone who listens to these words of mine but does not act on them will be like a fool who built his house on sand. The rain fell, the floods came, and the winds blew and buffeted the house. And it collapsed and was completely ruined.”
The most important thing about buying a house is to make a conscious prayerful, faith based decision to seek God’s will for you and your family.