Oh man, guys. Stuff moves fast, I’ll tell you what.
So, unbeknownst to you, That Learning Gal and myself have been searching for a house! Surprise 😀 Now, I know you might be saying, “Don! What’re you doing? You guys have a lot of student debt still. Do you even have a down payment ready? How can you afford to do something like that??”
Wow…you have been trained in the art of personal finance and frugality well, young grasshopper! It’s true. If you look at the monthly reports, you’ll see we still have a lot of student debt, and we will be more leveraged when it comes to getting a house.
However, you may also know That Learning Gal and I are not fools.
Unlike a goodly portion of people out there (not you of course!), we spend much, much less than we make. If you don’t include our student loans in our spending (like we normally do), a rough estimate puts us spending about 32%-37% of our take home income. On the flip-side, this would give us a savings rate of somewhere in the ballpark of 63-68%. Not too shabby!
On top of continuing to pay down our student loan debt at the cool amount of $2100/month, we’ve been saving anything extra we have as the down payment for the home since a little before our wedding in June! This has allowed us to accumulate over $10k to put toward our new home.
Just to be on the safe side, I made a few rules when it came to saving for this new, life-altering purchase (*gulp*). First, we couldn’t deviate from our student loan payment amount during this whole process. Second, I declared our emergency fund off limits. That $10k is sacred territory.
Now, I’ll break down our decision into the beautiful, the good, the bad, and the ugly.
We’re now own our way to owning our very first home!! Awwww yeah.
Another chapter of our life is unfolding before us as we look for a new abode together. It is a new experience, a new chapter! We get to have something that is our own to love and grow. It’s a pretty amazing feeling and we can hardly contain our excitement. Obviously there is trepidation about tying ourselves to such a large monetary value (what if the housing market collapses again??) and being stuck in one place (what if we lose our jobs??), but if people weren’t willing to put roots down or take on at least some risk, we wouldn’t be where we are today.
In addition, we’ll now be able to have our bros and brodettes over instead of us always going to their houses to hang out (lookin’ at you Krochorans!). Whether it is hanging out in the “great room” and watching a football game, or enjoying a night by the fire pit in the back yard while the grill’s burning, having a house that can be a social focal point is another beautiful thing.
The home has a toooon of potential for DIY projects to increase the value. The following are just some things if we put in the time and effort:
1. Install a backsplash in the kitchen
2. Replacing the “shag” carpet with hardwood or an engineered floor
3. Painting the walls more neutral colors
4. Replacing the counter tops
5. Painting cabinets
We look forward to doing all of it.
You know when people say a hard day’s work feels good? Well, I haven’t gotten to really experience that since I was just a youngin’ detasseling corn out in those Indiana fields. Believe it or not, sometimes I truly miss doing manual labor and seeing the results of your tireless efforts come to fruition. That will be an awesome part of becoming home owners with a property that has some potential to become something great!
Now we start getting into some of the more financial depressing items…
First, because we aren’t going to put down 20%, our interest rate got bumped by .125% to 3.325%…I wasn’t happy about this because we’re already paying the PMI due to not having a 20% down payment, so really, it’s like the credit union tried to hit us twice. However, I can’t be super made because that is still the best mortgage rate we were able to find. Chase had us around 3.5%-3.6% as one example.
Second, I know I am super stoked about projects to increase value of the house, but there is an ominous flip-side to that. We will be responsible for all repairs that need done. That is a loaded sentence. Think about it, all repairs. The finality of that statement is scary. If the roof collapses and it costs $10k to fix? All us. If the fridge gives out and a decent new one is $2k? All us. That is one of the negatives I look forward to the least!
Three letters, P-M-I. God, do I hate those bastard letters. Not having that 20% down payment seems to kind of be boning us pretty well, doesn’t it? Well, that’s how it seems at first glance, but let’s take a closer look, shall we?
1. Now, I bet after all of that, the main thought ringing in your head is, “Don…what’re you doing, maaan? Not having a 20% down payment? That’s not personal finance savvy!”
Well, if I am reading your mind correctly, before you degenerate me and relegate me to the annals of failed personal financiers, allow me to defend my honor!
First, I used the NY Times Rent vs. Buy Calculator to assist in the decision to buy a home. It is a pretty thorough calculator. I went through all of those fields and entered in the appropriate information. Upon doing that the calculator informed me if I could rent the same house for under $633/month, then I should rent, if not, I should buy.
When it came to this, I obviously made a lot of assumptions, such as return on stocks of 7%, that we would be in the house for 10 years, inflation, etc. So, it isn’t perfect, but it definitely is the best tool I’ve been able to find out there for giving you an idea of what might work best.
2. Can you even afford the monthly payment?
There is a very good rule to live by when finding a place to live, whether you are renting or buying a home, and that rule is:
Obviously, if you’re trying to reach FI and/or be frugal, that number is huge! That means if your pre-tax income is $80,000, and you spend 30% on rent, that comes to $24k per year, or $2000 per month! It depends where you live, but if you’re living in the Midwest like me, and you’re paying that much, you better have a personal chef cooking you Maine Lobster every night and a solid gold toilet!
That Learning Gal and I are currently spending $904 per month on rent. We live in a relatively spacious 2 bedroom, 900 sq ft apartment, including a washer and dryer rental. This comes to approximately 11.75% of our pre-tax income! As you can see, this is less than half of the recommended maximum.
We will be following pretty similarly for the total monthly house payment, which includes principle, interest, insurance, and taxes, or PITI (for us, we will be adding on an extra P, for PMI). After everything is said and done, our monthly payment will probably be something like $950. This still only comes to around 11.9% of our pre-tax income. So, below 20%, our PITIP would be about 11.9% of our current pre-tax income, and after 20%, it should drop to 10.6% of our pre-tax income. Not too shabby for a house. Ya gotta love the Midwest in that respect! As you can see, after 20%, the monthly PITI payment will be less than our rent is. I call that a win-win-win.
3. That PMI is such a waste of money!
That is very true, but once we hit that 20% mark of having the principal paid off, we will no longer have the pesky PMI. We’re looking into the possibility of transitioning funds from our student loans over to the mortgage so we can hit 20% within the next year or two. With our savings rate, we should be able to hit that mark easily.
4. On top of the above, let’s contribute the obvious listed above:
We will be building equity, we’ll get lots of nice tax benefits/breaks from owning a house, we’ll have a sense of accomplishment, be able to start projects to increase the value, etc.
From here, we’ll have a lot to get done before this home is ours. I want to try and share every step of the way, so look for more posts on how things are going and the decisions we are making! The direct next step is the inspection. I don’t have many worries, but there were a few things I had some iffy feelings on during our private walk-through of the home. We have sixty days (that was about 13 days ago :P) to get the process completed, so I’ll be trying to detail everything as quickly and as completely as possible. See ya guys!
Wish us luck!