When should I think about buying a home?

Fly girl asked:


I’m 26. I have held a steady job for several years now. I have a decent credit history. Most of my debt come from my undergraduate student loans (approx. $48,000). I pay them every month and I am always on time. I have a plan to get them all paid off somehow within the next 4 years. I’m trying to build my savings, too. I’m doing better than I’ve done in the past in that area.

I’m single and I live in a place with a high cost of living. I rent. I am paying almost $300 more a month than I did 3 years ago. It’s getting to be ridiculous.

I have seen many decent co-op apartments that are affordable as well as very few houses. I belong to a teacher’s union that offers some assistance in home ownership counseling and in obtaining low interest mortgages with little or no money down. I wonder when I should start this process of home ownership?

Now or later? Thanks!

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2 Responses to “When should I think about buying a home?”

  1. shamieya Says:

    February 25th, 2009 at 6:01 pm
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    Commercial Real Estate San Diego

    I believe when you should start depends on your plans for the future.
    If you like the city you’re in and plan on staying there, start now! There’s no reason you have to wait, other than conventional wisdom which says you need 20% down. (Of course it’s better to have money down, but it’s your money, you can do what you want, and when you make more you can pay more on the mortgage)
    If you know you will be moving soon, I wouldn’t buy anything unless it was an investment property you could make a profit on within the time you will be moving.

  2. ? Says:

    February 27th, 2009 at 3:07 pm
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    You asked a very good question because home ownership is a tremendous financial commitment with advantages and disadvantages that justify consideration for each person at different stages of their lives. But you also did not provide enough information so here is a smorgasbord of tips.

    Home ownership has some potential tax advantages. The advantages only help if your total itemized deductions will exceed the standard deduction. So if you currently give $1500 to your church and charities you would not itemize. If the total mortgage interest and property taxes totalled $5000 a year, you would itemize as that would be $1150 more than the standard deduction of $5350 for a single person. Then you would save the taxes on the $1150, which at 20% would be only $230. You could very well spend that on maintenance as now the termite warranty, light bulbs, A/C filter, mowing, dripping faucet, and roof leak repairs are now all your responsibility.

    One great advantage of home ownership is that a fixed interest rate means your mortgage will never increase (although taxes might and insurance definitely will with inflation). So if you let the mortgage company hold escrow for your taxes and insurance, your total payment might gradually creep up, so you might be paying $75 more a month 3 years later, mostly due to increased insurance costs. Don’t get an adjustable rate mortgage (ARM) that you can manage for 3 years, struggle for 2 and go bankrupt in the next 5. An ARM is a marketing trick that is half the reason for the nation’s current national housing credit crisis. The other reason is dishonesty like inflating salaries on applications. Every person in the country should learn from that lesson as if they are driving in traffic that is going off the end of a collapsed bridge. If you don’t want to end up like them, you have to try a better path - a fixed rate mortgage and complete honesty on your mortgage application.

    You need to consider how much you can afford to buy, based on your savings. You should bring some down payment, like 3-20% down to get better interest rates so it will reduce your payment by having to borrow less and having to pay less to borrow it. Also, you will need savings for all your utility deposits, extra furniture and appliances, lawnmower, and loan closing costs. So if you have $10K saved up, you could use $3K for a 3% down payment, 4K for closing costs, 2K for appliances, and 1K for utility deposits. That would buy a $109K house, negotiated down to the affordable $100K, which in my area would buy a nice 2 bedroom condo or an older 3 bedroom home in decent condition needing no more than a refrigerator, washer, and dryer. Drapes, ceiling fans, hot water heater, stove, and dishwasher are supposed to stay with the house and anything else is a bonus and negotiable like the price, carpet, paint, and repairs allowance, and everything else associated with the house (Don’t pay the asking price without negotiating something).

    Also, you need to consider how long you plan to live there. If you are expecting to change jobs in a few years, maybe even change employers, but still live in that house for at least 7 years, you can go ahead and buy it. One reason is when you buy anything whether it is a car, a ring, a house, or anything else, when you buy it, you can expect to pay a little more than what you can sell it for. Then there are the selling costs that run 2-3% of the house, plus realtor commissions, if any, which are another 3% for each transaction, the costs to fix up the house to resell it, like fresh paint, catch up on all repairs, perfect landscaping, and last of all, the moving costs. Even if you move yourself, you might wind up springing for pizza for all your friends that helped you move, plus the gas guzzling van rental, and don’t forget the drops, dings, and scratches that breaks lamps, dishes, or picture frames or at least adds a little wear and tear that adds up to one day when you finally have to break down and get something fixed or replaced.

    Your home should cost about twice your gross annual income. If you have high tech gadgets like a cell phone and cable, a late model car and that school loan, twice your annual income would be enough for you. So if you earned $60 grand a year, that is $5000 a month before taxes, maybe $4000 after taxes and low health insurance deductions and your house payment would be about $1000. For a 30 year fixed rate of 6.75% on $97K, you would pay $620 for principal and interest, $200 for taxes, and $180 for insurance. If you can work out a reasonable budget on the rest of your salary, then you can adjust these numbers proportionately so if you can afford $1500 for a house payment, plus utilities, food, car, school loan, etc, then your principal would be about $930 and your house could cost around $150K.

    Keep working on paying your bills on time, reducing debt and saving money, but don’t cancel credit cards once they are pai