House Rich, Cash Poor
You'll life will be incomplete and miserable unless you purchase a big home, large yard with a fountain and a white picket fence. What your relatives and banks do not tell you, are the realities that lurk in the shadows. One in three first time home buyers regret their purchase and 64% report their home buying experience as stressful. Why? MONEY. Financially purchasing a home is a massive decision, one that should be thought out and calculated correctly.
It's also an emotional rollercoaster.
Pre-approval
Proof of funds
Downpayment
Closing costs
Pre-paid taxes
Home inspections
Pro-rated utilities
Negotiations
Competing offers
Delayed closing date
Expired locked-in interest rate
Deed issues
Is this our forever home? (It's not, Americans move every 5 years on average)
Repairs we have to do as soon as we move in. "It won't be expensive; Uncle Jim knows how to do it."
Home buyers get themselves into a pickle by purchasing a home out of their price range because they are basing their decision on potential future outcomes and "in the moment" emotion.
I'll get a raise at work.
Our family will outgrow a smaller home, so bigger is better.
We will live here forever, so it's worth it.
Someday I'm getting an inheritance that I can use to pay towards the home
Honey, we need a new kitchen, bathroom and paint colors, I could never live in it the way it is now.
If we don't pay full price, we will never find a home like this again.
I'm tired of house searching, lets settle for this.
Uncle Jim says the value is guaranteed to go up year after year.
These are simply hopes and emotion deteriorating your brain, it is not a plan. Rarely does life goes as planned so the last thing you want is a home that is causing you to grind your teeth at night and scream at your spouse.
Below are a few home buying recommendations:
Opt for a 15- or 20-year mortgage. The first 10 years of a 30-year loan at 5% interest, 29% of your payment goes towards the principle. Meaning a $400,000 mortgage on a 30-year payment plan at 5%, you pay $183,043 in interest the first 10 years!! YIKES! That money is burned in a trash can. How many hours of your precious life did you have to work for that hard earned money?
If you want to get wealthy, keep housing expenses (mortgage + taxes + utilities) to no more than 10% of your gross income. If you make $100,000 gross per year, your monthly allocation for housing expenses would be $833. Yes, its low, but remember your goal is to get wealthy.
If you want to be a member of the stressed-out middle class, keep housing expenses under 30% of your gross income. ($2,500 per month using the above example). While you probably won't foreclose on the home, you will not feel like you're getting ahead financially.
If you want to be chained to your desk job you hate, stressed 24-7 and eat Raman noodles for breakfast, lunch and dinner, I recommend spending 50% of your gross income on housing expenses. ($4,166/month)
Learn to do your own home renovations and repairs. Approximately 50% of the costs goes towards paid labor.
Delay purchasing a home until you can put 25% down. That would be $100,000 on a $400,000 purchase.
Once you purchase your home, rent a room out or convert a garage into an apartment. Depending on what part of the country you live in, these small spaces bring $400-$1000/month.
Purchasing a home is a mathematical process. Yes, you need to love the property you are buying, but before pulling the trigger, run the numbers, and ignore your emotions. Once you get an accepted offer with numbers that make you warm and cozy inside and not defecating in your pants, go celebrate.