This past year, I made a critical error regarding my finances. I truly did something I wholeheartedly regret.
No, I didn’t cash out my 403(b) and jet around Europe.
No, I didn’t invest $50,000 in one stock fund and lose it all.
Did I quit my job, become an entrepreneur and suddenly, cause my business to go belly-up? Nope.
Here’s what I did: I sold my house.
I sold my first house, the one I bought when I was 24. The house with the adorable little tan and light green shutters and small, equally adorable shed in the side yard.
I sold a perfectly good rental home, which could have given me income (potentially uncomplicated income, at that) for the rest of my life.
It took me a few months to realize the grievous error I’d committed, but I eventually figured it out while reading a personal finance book — in it, an entire chapter is completely dedicated to homeownership. (If you’re curious, the book was Start Late, Finish Rich by David Bach, who happens to be my favorite financial expert.)
Here’s what happened: Almost ten years ago, when we got married, my husband I decided we wanted to build a house in 2017. However, we changed our timeframe. To take advantage of the lower mortgage interest rates, we bumped the house-building timeline up by a year. If we’d had another year to pump up our savings, the outcome might have been different, but alas, we took advantage of the equity we had in our first home, sold it, and applied all of that equity to the house we built.
Okay, okay, I know this wasn’t a disaster of epic proportions. We still had equity in the first house and still applied that equity to another investment. All right, I get it.
And anyway, I digress.
Owning a home is your ticket to wealth.
Okay, let’s get to the real topic of owning your own home. Never mind the fact that you could own two homes—how about just one? As a renter, you could easily spend half a million dollars or more on rent over the years. Think about it. If you spend $2,000 a month, that ends up being $720,000 over 30 years. Yeesh. Imagine the beautiful home you could have bought with that amount.
According to some experts, buying or owning your own home is a waste. (Google “Grant Cardone and buying a home.”) I heartily disagree and would caution you to not listen to that type of advice.
If you buy your home with quite a bit of a down payment (and especially if you decide to go with a 15-year fixed mortgage on top of that) you’re in a whole heck of a better position than someone who’s renting long-term. It’s simply the truth: How are you not building wealth if you’re using your home as a savings vehicle?
How much home can I afford? And what about all that legal gobbledy-gook, anyway?
I think there are some awesome mortgage calculators out there (God bless IT geniuses—I find it so amazing that they can build stuff like that for mathematically-challenged people like me.) One of my favorites happens to be: http://usmortgagecalculator.org/ because it’s so comprehensive.
This mortgage calculator tabulates how much you’ll spend if you eke your payments out over the course of 30 years; it includes property taxes, homeowner’s insurance, homeowner’s association fees, etc., etc.
I get it that buying a house can be complicated, and more than once, you’ll say things like, “Amortizwhat?” when going through the process. Don’t be daunted. Get yourself a great real estate agent and a patient loan officer and go slowly through the process.
15-year vs. 20-year vs. 30-year vs. Jumbo vs. Adjustable vs. Fixed, etc. mortgages
The financial world is so complicated, isn’t it? There are a bundle of options, and I’m not going to go through them all here. (Much to your relief, right? Ha!)
I will share a tip with you straight from Dave Ramsey, the money guru. He says that a 15-year, a fixed-rate mortgage will save you big money in interest in the long run, versus a 30-year or variable rate mortgage. You can check his website out at www.daveramsey.com. He offers lots of free advice on his website.
Down payment problems? Consider an FHA loan
For first-time homebuyers, there may be some unique hurdles you’ll encounter in the home-buying game. Often, the toughest part for some individuals is coming up with the required down payment. If you really think you’re going to have trouble, there is always an alternate option—it’s just a matter of exploration.
Is an FHA loan a possibility for you? An FHA loan is a government-backed home loan insured by the Federal Housing Administration (FHA). You, the borrower, pay a mortgage insurance premium, which protects the lender if you happen to default on the loan. Note: the lender is NOT the FHA—the FHA only insures the loan.
Here are three fast facts and reasons why you can get excited about an FHA loan:
- Your down payment can be as low as 3.5 percent.
- Some closing costs may be covered by home sellers, builders or lenders—so you, the borrower, wouldn’t necessarily have to shoulder the complete bill. In fact, sellers can contribute up to six percent of the purchase price toward a buyer’s closing costs.
- Think it’s impossible to get a loan with your low credit score? Think again. You may qualify for an FHA loan with a credit score of 580. (You can qualify for an FHA loan with a score lower than 580, too, but you’ll need to have a larger down payment on your home instead of the 3.5 percent mentioned earlier.)
Fortunately, it is possible for your family, friends or even your employer to help you make the down payment more manageable.
However, there are strict “no strings attached” requirements regarding that down payment, meaning that it truly must be a gift and there should be no expectations about repayment of that money. According to the HUD website, gifts can be provided by:
- A family member
- Your employer or labor union
- A close friend
- A charitable organization
- A governmental agency or public program that provides assistance to first-time homebuyers or low-to-moderate income families
For more information or to see if an FHA loan is right for you, visit www.hud.gov.
A challenge: If you get one thing out of reading about home ownership, please do yourself a favor and buy a home.
Also remember, a beautiful idea that I’d like to challenge some individuals to accept is to buy a home, live in it for a while, and then when you either outgrow it or would like to move, buy another house. Keep the first one to rent out. (Check out this article about becoming a landlord). The rent will pay for the mortgage on the first house, and eventually, that rent might even help pay the mortgage for you on your second house. It’s so simple, it’s scary.
Ultimately, buying one or two homes (or a dozen!) will propel you toward steady wealth. Remember, you can’t get rich in real estate by renting! Good luck, and happy house-hunting!