In 2019, BUYING A HOME IS FAR MORE COMPLEX THAN WHEN I PURCHASED MY FIRST HOME

I discussed the information and process for buying a home with two young ladies in recent weeks. 

THINKING ABOUT BUYING A HOME – FIRST DECISION – SHOULD YOU RENT OR BUY?

THINKING ABOUT BUYING A HOME – FIRST DECISION – SHOULD YOU RENT OR BUY?

FACTORS TO CONSIDER BEFORE BUYING

  • How long do you intend to stay in this home?   If less than five to six years, renting may be a better option.  It typically takes five or more years to cover the cost of buying. 
  • Can you afford the cost of buying – TODAY?  You must include a lot more costs than the mortgage:  Insurance, Real Estate Taxes, Lawn Maintenance, Snow Removal, Routine Maintenance – which can run several thousand dollars per year, etc.  Remember “YOU OWN EVERYTHING – building exterior, roof, windows, doors, appliances, floors, plumbing, electrical, HVAC, EVERYTHING.  YOU BREAK IT – YOU OWN IT!  Another reason you absolutely MUST have a minimum of six months emergency funds to cover the unexpected cost. See below previous blog on Emergency Savings…NOT A WANT BUT AN ESSENTIAL NEED.
  • Will the new tax law limit your deductions for real estate taxes. New law limits your State taxes and Real Estate taxes to $10,000 deduction.  Ten thousand does not cover our real estate taxes much less our state taxes!  Certain states {NJ, NY, IL, and more) have VERY HIGH real estate taxes which makes it more difficult for new home buyers, as well as existing owners!
  • Are homes in the area you are looking appreciating at or below US appreciation average?  If your new home will not appreciate it is a poor investment. 
  • Above average appreciation in cost of homes in certain parts of the country, making them unaffordable for MOST AMERICANS.
  • Some parts of the country where real estate prices were reduced by 30% or more in 2008 and still have not fully recovered.
  • Declining public school ratings in some cities and counties.  Lower school ratings reduce the value of the property and make it harder to sell in the future.
  • Get to know the area, BEFORE you buy.  You may not want to live in this area. 
  • ALWAYS DO A HOME INSPECTION PRIOR TO PURCHASE! This inspection significantly reduces the likelihood of very expensive surprises and gives you ammunition in negotiations with the current owner.

BUYING YOUR FIRST HOME

BUYING YOUR FIRST HOME

I purchased my fist home for about $48,000 fresh out of college. I still own that property today and rent it.  Today’s value is about $140,000.  Next week I will talk about investing in rental property. 

When I finished college, we were taught/encouraged to buy a home as soon as you can afford it.  That advice is not necessarily true today.  The above factors make buying a home a more complex decision today.  Bottom line, you must do your research and determine if the area is a good investment or if you are better to rent.

TARGET 25% OR LESS OF YOUR TAKE HOME PAY FOR A MORTAGE

Neither the mortgage lender nor the real estate agent necessarily has your best interest in mind. In fact, it is in their best interest for you to buy the maximum cost home. 

The average married couple with children spend ~32% of their take home pay on housing, and single individuals, spend ~36%.  Those percentage of spending leave little room for layoffs, or major unexpected cost. I strongly advise paying no more than 25% of your take home pay towards a mortgage.  PROTECT YOUR INTEREST!  Be ready for your spouse losing a job, very expensive unexpected repairs, health crisis, bail (just kidding – but you get the point – S–T happens!) 

TARGET 25% OR LESS OF YOUR TAKE HOME PAY FOR A MORTAGE

MORTGAGE IS FAR FROM THE ONLY EXPENSES WITH BUYING A HOME 

In addition, to a mortgage the average owner(s) spend another $15,000 or more annually! WOW!!

  • Maintenance and repairs: ~$3,000
  • Home improvements: ~$7,000
  • Property taxes: ~$3,000
  • Homeowners Associations Fees: ~$2,000
  • Homeowners insurance: ~$1,000
  • Private Mortgage Insurance: ~$2,000

In addition to your mortgage and the above routine expenses, many of you have college loans and ALL oF you MUST be saving for retirement.  Exceeding 25% towards your mortgage jeopardizes your future retirement! 

HOW MUCH SHOULD YOU PUT DOWN

Many experts recommend paying 20% down to avoid paying private mortgage insurance (PMI). PMI is a required insurance you pay, if you put less than 20% down. PMI protects the lender—not you—if you stop making payments on your loan.  Depending on your credit rating and other factors it can range from 0.5% to 3% of your mortgage payment each month.

EVIDENCE BASED DECISION ON HOW MUCH TO PUT DOWN

EVIDENCE BASED DECISION MAKING

Instead of following a set rule, make your decision – using evidence. If you buy a $350,000 home you can select to pay 20% down, lowering your mortgage payment and eliminating the PMI fee.  Lets assume your PMI fee is 1%, so you save yourself $3500/year or $292/month.  

OPTION A: If you finance the entire $350,000, with a 30 year loan at ~3.75% your mortgage payment is ~$1,621 + $292 (PMI) = $1.913  

OPTION B: If you pay 20% down and finance $280,000, your mortgage payment is $1,297.  Saving  $616 monthly.

THE LONG TERM FINANCIAL IMPACT OF ABOVE OPTIONS

OPTION A: ZERO DOWNPAYMENT AND YOU INVEST THE $70,000 IN A ROTH IRA, S&P 500 ETF 

You and your spouse can contribute a maximum of $6,000 each annually.  In less than six years, you can contribute the entire $70,000 in a ROTH IRA.  If you decide to make ZERO further contributions, at the end of 30 years, assuming 8% average annual return, you will have  ~$765,500.00, TAX FREE DOLLARS

OPTION B: YOU PAY THE 20% OR $70,000 DOWN PAYMENT AND SAVE THE $616 EACH MONTH IN YOUR ROTH IRA’s

In Option B, you keep contributing the $616 monthly, until you reach $70,000 contributions or ~113 months.  If you decide to then stop making monthly contributions, at the end of 30 years, assuming 8% average annual return, you will have $540,689.00 TAX FREE DOLLARS

As you can see from the above example, you may be better to invest part or all of your down payment, as long as your mortgage payment is less than 25% of your take home pay.  Decide what is best for you and your family.

CONCLUSION

My Parents Home

A house is the biggest purchase that many Americans will make. With no experience, how are you supposed to know what to look out for? 

Ask your parents, family and friends their lessons learned.  There is plenty of literature on the web or the public library.  DO YOUR HOMEWORK BEFORE BUYING! 

Just remember when you buy that home, there are a lot more cost and you must be prepared to pay.  The purpose of today’s blog is to make you aware of some of the common expenses and decisions required prior to buying a home. 

One last reminder – The average homeowner gets a 30-year loan.  Lenders also have 20, 15 and shorter year loans.  Shorter loans will save you tens or hundreds of thousands of dollars in interest!  If you can afford it, consider a shorter loan.

Next week, I will discuss one of the best investment options on this planet!  Owning rental properties.  

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ABOUT ME

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached, and mentored by strong men and women in both my family and professional life.  It is time to serve and give back.

DISCLAIMER

I started my first business at ~13 years of age. I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or fiduciary financial advisors.  

Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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1 thought on “In 2019, BUYING A HOME IS FAR MORE COMPLEX THAN WHEN I PURCHASED MY FIRST HOME”

  1. This is really powerful stuff Styron! Thanks for sharing your wealth of knowledge. I look forward to future posts!

    Thanks for reading Chris. Let me know if you have any ideas for future blog topics. Or if you want to be a contributing author. From what you Mom tells me you have some good investment practices you should share!

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