A recent Redditor naively asked for advice in purchasing a home that was “only” about one-third higher than their budget called for. Her argument was that houses in their price range were pretty drab, and she wants to move into a home that will be more permanent – she doesn’t want to get a home she dislikes only to move a few years later. Her plan was to “grow into the home financially”, waiting a year or two for her boyfriend to get a raise in order to put their income where it would need to be for the home.
Readers of her story were immediately floored. You simply cannot plan to financially grow into a home as things can easily go awry. It became clear to the readers – mostly real estate professionals – that this situation would not end well.
Being “house poor” – spending a large proportion of your total income on your homeownership – can take a toll on even the best relationship. It is incredibly easy to begin resenting your partner when you stress about finances daily. This Redditor, if she follows through with the purchase, will be making a huge mistake. We’re here to ensure the same thing does not happen to you.
A home is not an investment.
Do not assume that real estate will go up. On the brighter side, do not assume that if you wait another few years, your dream home will be more expensive. The real estate market is constantly fluctuating based on activity, and we all saw what happened in 2008 with the market crash. You could buy a home at one price and end up selling it a decade later a few thousand less than you paid for it yourself. If you are not planning on living in this home for more than seven years, it is generally cheaper for you to rent.
In even some of the best markets, a home may only have a return around 78%. If you ran in the stock market, investments could have a return of over 150%. You’d be far better off in a slightly smaller and cheaper home and investing in the stock market than purchasing a larger home just for the sake of it. Of course, it is far more complicated than this and finances are not always so predictable. A good investor will diversify.
Realize your budget is not negotiable.
Buying and selling a home can be very expensive. Between commissions and closing costs, you’re paying around 10% above the price tag of the house. On top of that, the first few years of mortgage payment will primarily be paying interest on the mortgage.
Your budget is there for a reason. Under no condition do you plan it based on future wages or possibilities. This bizarre idea of growing into the home will not work – the lack of money will effect you every month until you start making more. What happens if you never do? A good rule of thumb is to live off of approximately 50-70% of your income, and to save the rest in case of emergency.
Your budget is your budget. It doesn’t make sense to spend over your budget because it is over your budget. If you cannot afford something, do not buy it. Budgeting certainly isn’t fun, but it is all about discipline. In the long term, it (literally) pays off.
You always need to be prepared for unexpected homeowner costs.
Speaking of your emergency fund – we recommend you have at least 1% of the price of your home prepared each year for potential disasters. A new roof can cost over $10K, and sewer problems over $5K and these expenses are often not covered by insurance. This is, of course, on top of property taxes and basic maintenance and upkeep.
Houses are work – they are expensive and they are time consuming. Your home will need maintenance whether you are financially prepared for it or not. The best thing you can do for yourself is to prepare for these costs before you even make the purchase.
Live below your means so you can live well.
You deserve to live a life of comfort and satisfaction. Do not buy a home with the intent to cut back on unnecessary luxuries you already partake in – a true change in habit is a difficult process. You should be able to treat yourself. You should be able to make basic purchases without stressing about your bills that month. You should be able to take time off work occasionally without worrying about the money you’ll miss out on. Your home is where you live – it is not just the place, but the lifestyle you’ll be required to live after the purchase.