Home Buying by a Gen X and Gen Yes
Most people reach a point in their early adult lives where they are ready and want to buy their first house. Being a first-time home buyer can often be a scary and overwhelming process, even for those with full-time employment. Regardless if you are single, engaged, recently married, or have small children – committing to purchasing a home, making mortgage payments, and keeping your finances afloat is a HARD job and commitment all in itself. This is especially true if you are trying to raise a family in California. I hit a lot of bumps along the way while I was buying and selling my first home, and stumbled over some even harder bumps that many face in similar situations when married and sharing these decisions, and consequences, with another person. I share my story and experiences and in turn hope to help others learn from my path to home ownership. The Braysics First Home I never owned property until we were married. We purchased our first condo in 2011 for $432K. I used a gift from my in-laws and a $10k distribution from my IRA for the down payment. I did have to pay income tax on this distribution, but no penalty because it was for a 1st-time purchase. As time went on, we were not doing so well managing our credit cards or our debt. This caused some tough times in our relationship as my husband and I struggled to communicate about our finances. It is true what they say, money is often the number one thing that causes tension in a marriage. Still, I kept pushing forward and forged ahead in my career. We decided to add a loft and thought we were being wise by having a budget and making improvements to our home to increase its value. I was sadly wrong. Like many, we underestimated the costs of remodeling by about $10K. I forget to calculate the cost of necessities such as paint and furnishings. About two years after the renovations were completed we decided to sell our home. We were very fortunate, and it sold for $575k. If this had been ten years earlier or had we not had a financially savvy member of the family (i.e. me and my financial knowledge) to help, this could have ended very differently. Second Home When went to purchase our second home we thought we would get it right this time. We would have our budget and our wish list, and we would buy our dream home. Well, we were wrong again. The first item on our wish list was a pool, but the home we ultimately chose did not have a pool. We thought with the lower cost of the home we could comfortably afford to put in a pool ourselves. Well, again, we were wrong. After moving in we determined that at one time, there had already been a pool – and it had been covered over. Due to the slope of the backyard, there was a problem with leaking, and we would unfortunately never be able to put in a pool afterwards. Nonetheless, a pool would have been a really bad “investment” if we installed it and moved within ten years anyway. This lead to the decision to take out a HELOC, refinance our debt, and make improvements to the house. We updated the kitchen, put on new shutters, and did some other small projects. The return on investment of this decision was roughly 7%. Much better than the pool. Where are we now? Things we should have considered:
The Market We should have considered what would have happened if they money my in-laws gave us would have done if we had invested it in the stock market? But, it’s likely our parents weren't giving us a gift to invest in the stock market, so it really is not a fair comparison. I would have to do some complicated math to see if we ended up in a better place – financially. I also need to consider that we received an interest deduction, didn't pay rent, and also added two kids over the time period that we would have needed space for.
Our #1 Priority: Pool We still don't have a pool, but just when we might be able to finance one, the new tax bill says our state income tax isn't going to be deductible, and our property tax is going to use up most of the bucket. This means moving to a bigger house with a pool is no longer in our foreseeable future.
Refinance Instead of a pool, the husband says we should refinance to a 15-year mortgage loan term. This would sweep up existing loan at a 4.125% interest rate and HELOC at a 6.99% interest rate into a 15-year mortgage loan at 3.99%. We will muddle through the next 15 years, but the house will be paid off by the time the kids enter college which we hope will give us more financial flexibility. The husband might be onto something with this idea, and has initiated an excellent financial decision for our family. Could a 15-year mortgage loan be right for you and your family? Doing it Right
So, what would I go back and tell my younger, first-time home buying, self? Prepare! Prepare mentally and financially. Buying a home can have a ripple effect on everything else in your life for a long time. Here are some things to think about when deciding to buy your first home. Preparing Mentally You need to seriously sit down and list out your priorities. If you are married or are making this decision with someone else, they need to be included as well. You must be on the same page. There are going to be non-negotiable items like the number of bedrooms and bathrooms you need, or the general location of where you purchase your home. There are going to be things that you would really like to have but might be willing to give up for the right house. Remember my pool? For you, this could be a big kitchen, fence, or garage. There will also be some things that would be nice but not deal breakers like having a house that is move-in ready or already updated. These could be things that you are willing to add later if you are financially able to. Remember that priorities are different for different people. If you don’t plan to have kids, then schools aren’t that important. If you own a large dog, then you need a backyard and a fence to accommodate your pet. One thing to always keep in mind however is resale value. If you know that this isn’t your forever home and that you are going to sell it at any point, then you must think about what others will be looking for. You must also consider your lifestyle. Is there a wedding on the horizon, children, or more children? You need to think somewhat long term. Can the house grow with you, or will you need to move? Preparing Financially Now that you have an idea of the things you are looking for in your first home, do you have realistic expectations of the expenses associated with buying a house and being a homeowner? Do you know how much you can really afford? Have you looked at your household income and expenses on paper and done the math? Also, consider if your finances are going to change soon. While most people assume that as their careers progress over time their income will go up, this is also true of their expenses. New car, kids, paying off student loans, are all expenses that you need to consider and add to your monthly total when buying a house. They are all non-negotiable items that take up a piece of the paycheck pie. Most people don’t realize that their income to expense ratio is often much lower when they are younger. That is why it is so important to start saving early.
Key Takeaway: When you are younger even though your income is smaller, your monthly expenses are often at the lowest they will be your entire life. When looking for a home you must also look at more than just the listing price to see if it will fit within your budget. Things like property taxes, utilities costs, homeowners insurance, and homeowner association fees will increase your monthly expenditure needed to buy a home. There are always fine print add-ons so beware! Another thing first-time homebuyers often overlook is the fact that one house may increase monthly expenses more than another house. This needs to be considered. If you are willing to move outside of your ideal location this may increase your daily commute to work causing increase expense in gas and eating out. If you are willing to look outside of your ideal school district, then have you considered the costs of private schools in the area? Finally, are you financially ready for the cost of purchasing a home? Do you know your loan limits and how much you are approved for borrowing? Do you know what rates you will be offered? This is often dependent on your credit score and credit history. How much can you afford to use for a down payment, where is that money coming from? Have you realistically looked at fees and closing costs, are you going to roll them into the loan or pay for them at closing? You must always remember that while it may seem like the easy thing to do is to just wrap it all up into the loan and not worry about it, that is not always the case. A larger loan, or higher rates, means more interest paid over time. All of this can add up quickly. My final words of advice… take your time, don’t rush, weigh your options, and have a firm and realistic grip on your finances. This is a huge life decision, emotionally, physically, mentally, and financially. I want to help make sure that you are doing it right the first time and don’t have buyer’s remorse and financial strain early in life.
For additional resources you can download this except from the book Making Sense on the Dollar on why a house is not an investment. Sometimes having a neutral third-party can be helpful in figuring out this process. Please feel free to reach out and call GW Financial, Inc. and see how we can help you.
Julie Bray, CFP® is the President and a Client Wealth Manager at GW Financial, Inc (GWF) in Orange County and Palm Desert, California. GWF is an independent, fee-only wealth management and financial planning firm specializing in advising and engaging individuals, families, and organizations. They focus on coaching clients toward financial peace of mind through financial education, clear communication, and smart resolutions.