As someone who is more interested in personal finance than the average American, I read a lot of advice about making financial decisions. Financial considerations were a big deal when it came to buying a house. Husband Saign and I picked and chose which financial advice to follow, and what to ignore. Here’s the advice, and how we responded:
1) Save 20% for a down payment. Generally, this is very good advice. The logic behind it is three-fold 1) the bigger the down payment, the smaller the debt. 2) If you don’t have at least 20% down, you will have to pay private mortgage insurance (PMI), which is an added fee because the bank is terrified that you might default and they will lose money. 3) You can often get a smaller interest rate if you have more money down.
What we did: We had 11% down. We would have loved to have a 20% down payment, but guess what? We were living next door to a burglar. I will pay PMI to get away from a burglar. Now obviously we could have moved to another rental property to get away from the burglar while we saved for the full 20%, but it just really wasn’t worth it to us. Moving is a hassle for anyone, but with Husband Saign’s huge tools (because he works out of our home and has a lot of large, heavy specialty tools) it’s an extra big hassle for us. We wanted to get away from the burglar and get settled, so we went forward with buying without worrying about the PMI. Our PMI is $91 per month, so it’s really not too overwhelming. We’ll get rid of the PMI as soon as we have 20% equity in our home, which means that we won’t have to pay it forever. (And we plan to over-pay our mortgage each month, which will help us get there faster).
2) Move into the smallest home that you can be comfortable in. The advice here is twofold: 1) Smaller homes usually cost less to buy, which saves you money. 2) Smaller homes have lower energy costs (fewer lights, less money spent on heating/cooling, etc.), which saves you money.
What we did: We moved into a house that we can be comfortable in after kids are added to the family. Right now it’s Husband Saign, Ada the Dog, and I. We really don’t need a huge house right now. BUT…to us it made sense to consider the long-term. Our house is not extravagantly massive, but it gives us enough space to have a few kids and still have plenty of space for our hobbies. As far as energy costs to heat the home, the home we bought is bigger in size, but more efficient (better windows and better insulation) than our rental, so we actually anticipate that our energy costs will decrease.
3) Location, Location, Location. You can change a house, but you can’t change its location. Buy a home in a good location. Location can save you money through appreciation and reduced commuting costs.
What we did: We moved to a nicer, quieter neighborhood that is walking distance to grocery stores and other businesses. It’s also 2.5 miles to my work, which means biking when it’s warmer, and reduced gas cost at any time of the year.
4) Do NOT use all the money the bank offers you for your mortgage. This is good advice. Banks are not willing to hand out mortgages as freely as they would pre-2008, but they still are willing to give you a mortgage that can easily overwhelm.
What we did: Because Husband Saign is self-employed, I applied for the loan without Saign. Even though they only took into account my income, the bank was willing to give us more than I would be comfortable paying even with Saign’s income. It would have been insane for me to take on the amount of debt that the bank would give me without Saign. We chose to take out a mortgage lower than what the bank offered us.
5) Calculate ALL the costs, not just the mortgage. This means that prior to buying a house, figure out what your monthly payment will be each month including home insurance, mortgage payments, taxes, PMI, and other fees. This is very good advice, because you want to make sure that you’re comfortable with the entire payment each month.
What we did: I’d say that we kind of failed in this category. I was doing okay calculating insurances and the mortgage, but taxes were higher than what I anticipated. (I couldn’t find any information about how property taxes were calculated in Tacoma, and thus was pretty confused). When we good our Good Faith Estimate from our lender soon before we were going to close, I was a little surprised to see how high the taxes were. It didn’t change our monthly payment, as we had already agreed to pay extra on our mortgage to a certain dollar amount, and we are still paying the same dollar amount, but it means that we’re not going to pay off our mortgage quite as quickly as we thought we were going to.
6) Choose a 15-year loan. This is very good advice. By choosing a 15-year instead of a 30-year loan, you pay off your loan a lot faster, which means reduced interest payments. Fifteen year loans also typically have lower interest rates, so you save money there as well.
What we did: Because we chose a house that we could grow into (rather than a very small one that was less expensive), a 15-year loan wasn’t really viable for us. We’re planning on paying it off in <20 years, which will save us some interest, but we also have the ability to make the minimum payment on our 30-year-loan if we are ever in a bind, which gives us a little cushion for comfort. I’d recommend doing a 15-year loan if you can though!
Reflection: As I consider the choices that we made when buying our first home, I realize that we went against a lot of really good financial advice. I’m not nervous about the decisions that we made, since we are still living well below our means. But reflecting on the choices we made makes me realize that we could have made some smarter decisions. (That being said, I’m still willing to pay extra money to get away from a next-door-neighbor-burglar).
What do you think? Did you follow a lot of financial “rules” when buying your house? Any regrets?