Thoughts On Money


So, You're Buying a House ...

Pipe

Last week we discussed pearls of wisdom and highlighted some financial tidbits that one might want to pass down to the next generation.  I received some incredible emails from readers sharing their own pearls of wisdom and I loved hearing their stories about some different financial truths that made a big impact on them throughout their life.

Please do keep the emails coming.  Interacting with different readers from all around the world is truly the best part about writing this blog.

All these discussions and sharing of best practices really got me thinking.  I started to dwell on this idea about the difference between knowledge and wisdom.  To me, one of the biggest differences between the two is one’s ability to actually apply what they’ve learned (knowledge) to a real-life situation, that’s wisdom.

I thought this week we might take a real-life situation – my life – and see how those pearls of wisdom might apply.

And off we go…

House Hunting     

As the old schoolyard song goes, “First comes love.  Then comes marriage.  Then comes baby in the baby carriage.”  And for many, what comes next?  Buying a house.

Sheesh! What a stressful process – the searching, the offers, the counteroffers, the lending applications, the endless gathering of documents, etc.  It’s not only the biggest purchase you’ll make in your lifetime, but it’s also the most stressful.

I can relate because I am in the thick of it as we speak.  My wife and I saw a friend at an open house this weekend and I like the way she described it, “Zillow has become our new Instagram.”

To offer myself some relief and some much-needed guidance, I thought we might apply those pearls of wisdom from last week to my current home buying endeavor.  We’ll take a look at what it means to give first, know your numbers, and be patient while buying a home.

  1. Give First

What in the world could giving have to do with buying a home, right?

Remember, this pearl of wisdom is about giving first.  It’s the idea of prioritizing how you allocate your income.  So, when you are preparing to purchase a home, first you need to make sure you can afford it.  Affordability means it does not hinder your giving and saving.  It means you can afford your mortgage payment after you give and after you save.

As we discussed, you will need to set your own giving target, but here is what your budget might look like:

Give 10%
Save 20%
Mortgage Payment 30%
Everything Else* 40%

* Food, insurance, taxes, entertainment, etc.

The typical rule of thumb is to not have your mortgage payment exceed 30% of your income.  What you want to avoid is stretching yourself to a place where you need to take from other areas of your budget to meet an excessive house payment.  It’s all about priorities.

  1. Know Your Numbers

This is an important one when it comes to buying a home.  You will have a TON of numbers flying at you – interest rates, loan term, insurance costs, closing costs, property taxes, etc. and it’s extremely important to know these numbers and understand them in context.

Here’s an example.  There is an age-old debate out there about renting vs. buying and I’d argue that many of these debates create apples-and-oranges comparisons.  Again, context matters.  If you are renter, you typically have one payment – rent.  If you are a homeowner you may have one payment, but it’s made up of many parts.  Let’s say you pay $3,000 a month in rent and let’s say your mortgage would be $4,500.  At first glance one might say, “Wow! That’s 50% more” but again the mortgage is made of parts and those parts might look something like this:

Interest $2,700
Principal $900
Property Taxes $800
Insurance $100

When you factor the potential tax savings (mortgage interest deduction), let’s say $650 a month and realize that those principal payments ($900) are actually a form of saving (debt reduces and equity increases) then the comparison looks a lot different:

+ $2,700 (interest)
+ $800 (property taxes)
+ $100 (insurance)
– $650 (deduction)
= $2950

And all the sudden $2,950 compared to $3,000 in rent doesn’t look so bad.

Knowing the numbers allows one to better frame the decision and ultimately leads to more prudent decision making.  Here we applied this principle – know your numbers – to just one step of the process, this same exercise will bear fruit when comparing different loan options as well.

  1. Be Patient

Did you have a high school sweetheart?  For a small segment of the population, this teenage summer love may have led to marriage, but for the majority, it did not.  But do you remember how you felt about that person?  They could do no wrong, right?  They were absolutely perfect.

This type of infatuation can be blinding.  When it comes to home buying, this type of infatuation can be the enemy of patience.  Just remember, the enamor wears off, but unlike a high school fling, you can’t break up with a million-dollar mortgage.

Be patient and treat the home buying process like the search for that perfect suitor.  If you go into it with a til-death-do-us-part attitude you will be much better served.  As crazy as this sounds, my wife and I have to remind ourselves of this truth every day as we continue to search for that perfect forever home.

One rarely regrets being patient in life, especially when it comes to financial matters.

And that’s it…

That’s exactly how you do it, that’s how you take a handful of financial knowledge tidbits and apply them to a real-life situation.  That’s what wisdom looks like – knowledge in action.  Perhaps I will soon have reports of my own home purchasing success, but until then I will continue to give first, know my numbers, and be patient.

Thank you again for joining us and I look forward to hearing more of your feedback.  Email me at tcummings@thebahnsengroup.com.

Until next week…

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