So You Want To Buy A House, Part 2

Ok you’ve read So You Want To Buy a House, Part 1, answered all the questions (either yourself or with a partner), and you’re still excited to buy. Yay!

Now let’s focus on more of the numbers perspective. Buying a house generally comes with a whole host of other expenses that you are adding on that you may not think about, and they don’t all go away even when the mortgage is paid off! 

Even when you (eventually) pay off the mortgage, there are still significant home expenses to plan for that don’t go away!

Here’s a list of expenses, along with approximately how much to plan for:

Ok, phew. Now that you’re aware of the costs - how do you know if you are financially ready? 

How do you know if you’re financially ready?

A few things to look for and questions to ask:

• You don’t have any high-interest debt holding you back

• You have a solid credit score (and can likely qualify for better mortgage loan terms, if needed)

• You have the flexibility in your cash flow to take on all the ongoing payments (see above)

• You have made the mental commitment to be in the area or to at least own the house for the long-term (who knows where the market will be when you want to sell, and hopefully it won’t be lower right then)

• You have enough cash* for a solid downpayment without touching your fully-stocked emergency fund

• Buying a house fits into your life goals, and doesn’t hurt your retirement/financial independence goals and any other goals you might be striving to achieve (like going back to school, traveling, living in another country, etc)

If you meet these criteria, that’s awesome!

Let me just give you a few more words of caution (I know, I know, sometimes ‘Debbie Downer’ just comes with the financial planning territory, but wait for the end - it’s not all bad, I promise!)

*First, note that I specifically said “cash” in one of the criteria above - this money you’re planning to use for the upfront costs of home buying should not be invested if you’re going to use it so soon in the future. Make sure it’s there and ready for when you need it and not at any kind of significant risk of loss.

*Don’t let the tax tail wag the personal finance dog - the deductions are not always actually so significant to be at all worth being a justification for wanting it and/or purchasing a more expensive house that you otherwise can’t afford (eek!). Want the house first, and then look into the taxes.

*A mortgage is just principal and interest (aka ”P&I”), plus the PMI if you don’t put at least 20% down. Don’t just look at the monthly payments when you’re considering how much house you can afford - also look at how much total interest you will be paying over various time periods (e.g. 15-year vs 30-year). You’ll notice that even though interest rates are currently at historic lows , that still adds up to quite a bit!

*Be aware that realtors typically get paid on a % commission of the house sales price - so their incentives are not necessarily fully aligned with yours. Just be aware so you can stick to your guns ahead of time if need be. Especially if you’re in a tough market (with all cash offers, houses are selling for way above listed value, etc), then that’s even more reason to set goals and evaluate your desires ahead of time (and your realtor can help you here!).

*Renting is not always ‘worse’ than buying, or ‘throwing money away’. Do the math first. One of my favorite calculators is Smart Asset (not an affiliate link, I just love it).  When you compare the all-in costs of buying a house to renting, it often takes a loooong time for buying to come out on top - make sure you do the math because the results might surprise you!

*Putting a low % down can be dangerous. By doing this, you are banking on future house appreciation while also opening yourself up to being ‘underwater’ and paying extra via PMI for the privilege of doing so. (Being ‘underwater’ on a mortgage means that you owe more on the mortgage than your house is worth.) Appreciation is a fantastic bonus if or when it happens, but just like with other investments, you don’t want to have to sell at the wrong time when your house price happens to be down. Putting more down increases your equity in the property and reduces the likelihood that you would be underwater because it decreases your leverage (aka the amount you’re borrowing to buy the house). A house is generally the most concentrated, most leveraged purchase most people will make in their lifetimes! Coming back to PMI, as I said above it protects the lender against you defaulting or going underwater specifically because you’re putting so little down and this is much more likely than if you had put more down upfront. Any time that the other party requires additional insurance for extra protection that you won’t hold up your end of the bargain - that’s a danger sign. PMI does nothing for you as the buyer, and yet you are the one that has to pay it. 🧐

So there you go! The numbers, the pieces to consider, and how to decide if it’s right for you. Making sure a house fits into your life plan will only benefit you in the long run and leave you free to fulfill your dreams!

Need help deciding if you’re emotionally and financially ready to buy a house? Sign up for a free, no-obligation introduction chat with Sarah here!

Sign up for blog updates to stay on top of the latest Momentum blog posts!