One goal that my husband and I have is to own a house. This hasn’t been a spur of the moment decision. We’ve been planning it for awhile, and have been working together toward our goal one step at time.
The decision of whether or not to buy a condo, townhouse, or house can be overwhelming. Today I want to take a look at how to break down a potential home purchase and examine the effects of your decision on you and your family.
Renting is a waste of money
You might feel pressure from others to buy a home as soon as possible. After all, “If you rent, you’re just throwing your money away.”
While I’m sure that people have good intentions when they say such things, it’s still a huge generalization that doesn’t take into account your individual circumstances. If you’re in an area where renting is much cheaper than owning, then you might be better served by renting.
If you’re not sure if that’s the case for you, run the numbers on the this calculator from the NY Times. This can give you an idea of how long it would take to break even if you buy vs. rent a home in your area.
Another thing to keep in mind is that renting is a great way to try out a new living arrangement without (literally) mortgaging your future on a relative unknown.
Homeowners pay an opportunity cost in the form of all the other things they could be doing with their money if they were renting a cheaper place. When people buy a home, it’s often larger than their previous rental, and generally more expensive. Besides paying the mortgage, you have to add the cost of taxes, home insurance, and possibly home association dues.
It’s also important to keep in mind that any extra money you spend on your mortgage, homeowner’s insurance, property taxes, and maintenance is money you can’t set aside to invest. Can you afford to pay a mortgage and still invest? If not, you may want to continue renting until your finances are stronger.
While you might be tempted by all the “good deals” produced by the current housing slowdown, you still might not be able to afford the long-term costs of owning a home. How much can a house end up costing you? Yahoo! Finance had an article by David Crook where he ran the numbers on home ownership costs:
You can easily end up spending three times the purchase price of a house. Today’s buyer of a typical $300, 000 single-family home who takes out a 30-year loan will end up paying the price of the house again just in interest.
Add 30 years of property taxes, homeowner’s insurance, regular maintenance and a couple of big-ticket repairs or improvements, and the total cost of buying the home could easily top out at well over $1 million.
You’re pre-approved for a mortgage of $XXX, XXX
Just because your bank tells you something doesn’t mean it’s in your best interest to listen to them. We’ve been pre-approved for a much higher amount than we’re looking to spend. We’ve given our realtor a target price range around 65-70% of the amount the bank will give us. We want to continue to live below of our means, and we’d love to be able to afford a place with one income.
Instead of taking whatever they offer, get a mortgage that you can afford. Use a home affordability calculator – don’t just rely on what a bank or a mortgage broker tells you, as they’re often a bit aggressive with the numbers. My advice is to be conservative and keep your mortgage payment below 25% of your net monthly income. This gives you a bit more wiggle room, as you also have to pay insurance, taxes, and maintenance with a house.
Take advantage of the $8, 000 tax credit
If you can afford a home, the $8, 000 tax credit for first-time homebuyers is a great incentive. In case you’re not familiar with this credit, you have to make your purchase between January 1st, 2009 and before November 30th, 2009 and you have to stay in your home for three years.
This is a refundable tax credit, and itâ€™s phased out for individuals with AGI of $75k or higher or couples with AGI of $150k or higher. Here’s some info on how to claim it. Just be sure to look before you leap… Are you willing to spend $232, 100 (the median price of new homes) just to get an extra $8, 000 back form the IRS? We’re not, and I hope you aren’t, either.
Be willing to wait
We’ve decided that if none of the homes in our price range meet our criteria, then we’ll wait a bit longer and build up a larger down payment. When we do end up buying a house, we plan on staying there for a long time. Thus, it’s important for us to make a smart decision.
One of the big reasons that we rented a cheaper apartment was to be able to save some cash. We pay about $150/month less than our friends, which gives us some money to save with. We’re living below our means, and slowly building our savings.
Do you rent or own a home? What factors did you consider when deciding whether or not to buy? Are you happy with your decision? What (if anything) would you have done differently if you could do it over again?