My dad used to call me every Wednesday night to remind me to take out my trash for Thursday pickup. I was living on my own for the first time in nineteen years, and he worried that I wasn’t grown up enough to remember the basics.
Eye rolls aside, I probably wasn’t.
Fast forward ten years, and I handle trash day and on-time rent payments like a boss. I know how to make my paycheck stretch longer than my month. And I’m diligent about contributing to my retirement. But there’s one financial step I never quite felt adult enough to conquer, until now: the big, hairy beast of homeownership.
For me, the idea of making such a massive purchase is panic-inducing. Like encountering a bear mid-hike and deciding whether to stand tall and bellow or assume the fetal position and cry. Seriously panic-inducing.
My initial apprehension about homeownership came from a variety of places. I wasn’t sure if I could stomach putting so much of my liquid cash towards a down payment. I wasn’t sure about the potential uptick in monthly costs due to things like property tax and HOA dues. And the prospect of not having a landlord to call should things go wrong gave me hives.
Yet the upsides to homeownership in my particular situation were too many to discount. The townhome I was considering purchasing was the rental I was already living in, and it was owned by my boyfriend’s family. They weren't interested in turning a massive profit, and we could keep on living where we were. Also, with the booming housing market in Denver and surrounding areas, buying an affordable home now could potentially be profitable down the road.
More importantly, with a purchase price below what we could be approved for, we would never be house poor. That was the deciding factor for me.
Now, proud owners of our first home, I feel like a full-fledged adult with the financial know-how to do it all over again. If you’re considering taking this leap, here are a few first-hand lessons to take with you.
Is Now the Time to Buy? Here’s the Laundry List of Things I Considered.
No one would ever accuse me of making a purchase blindly. I will embark on lengthy internet searches and solicit the advice of everyone I know and still be hungry for more information. So after an exhausting research phase here is how I knew homeownership was right for me:
My Finances Were in Order
I knew the current state of my finances was indicative of how I would fare after becoming a homeowner. After all, purchasing a home doesn’t generally make a financial situation better or easier right off the bat. So here are the basics I considered before taking the leap:
- Credit Score: With the best loan terms going to applicants with a score at 740 or above, I knew my credit score was where it needed to be.
- Down Payment: I was able to cover the minimum 3-3.5% down payment required by some loans, but I could go as high as 20% if that were to be the best financial option.
- Emergency Fund: My emergency fund of 6+ months would still be intact after paying the maximum down payment.
- Retirement Savings: I was saving for retirement already and purchasing a home wouldn’t slow down the progress of that goal.
- Debt: With no student loans, auto loans, or credit card debt, this wasn’t a concern for me.
The Cost of Owning Wasn’t a Long-Shot from Renting
My monthly mortgage costs about $200 more per month than my rent did. However, given that we were renting from my boyfriend’s family, the rent we were paying in the Denver area was an anomaly. If we looked elsewhere for a rental, it would be significantly higher than our mortgage payment.
When it came to making the renting to purchasing comparison, here are the additional expenses I took into consideration:
- Property Taxes: The taxes on my property equal out to about $120 per month. Yours will depend on the area you live in and the assessed property value.
- Homeowner’s Insurance: This amount depends on several different variables, including home value and provider. I was able to find a policy for around $25 per month.
- HOA Dues: While I don’t have to shovel snow, I do have to pay handsomely for this and other services provided by my HOA. The dues in my complex are $225 per month.
One additional expense not included in my mortgage is an emergency fund to cover any unexpected repairs. Because the home was recently remodeled and everything major was replaced - including the air conditioner, furnace, water heater, and appliances - I felt comfortable pulling this from my existing emergency fund and continuing to fund it in small increments.
You can take a deeper look at what your monthly mortgage payment would be, including these extras, by using a mortgage calculator.
We Planned to Stay in the Home At Least 3-5 Years
From application and appraisal fees to larger closing costs, the actual purchase price of a home is a lot bigger than you’d expect. And after hunting down old financial paperwork and enduring plenty of back and forth communications, I know I don’t want to do it again anytime soon.
Luckily we went into this decision knowing we planned to stay for at least 3-5 years. If we had to pay realtor’s fees (something we avoided since it was for sale by owner), we would have needed to take this into consideration and consider staying longer.
Also, we agreed from the beginning to make bi-weekly mortgage payments (as opposed to monthly). This will help combat the fact that more money goes towards interest in the first few years of owning a home.
The Timing of Rates and Housing Demand
The demand for housing in Denver and surrounding areas is leaning towards insanity. A lack of affordable homes means many sellers receive multiple offers within hours. Pair this with a high cost to rent, and purchasing a home when the chance presented itself was the best option for us.
Here are a few other timing-related things I considered:
- The current cost to rent compared to the cost to buy in my area.
- The housing demand now and the outlook for the future.
- Current mortgage interest rates and whether now was the best time to get locked in.
Housing markets vary wildly across the United States and interest rates fluctuate. Therefore timing is a vital factor - just like individual financial circumstances.
Ready to buy? Here’s some advice from the front lines.
Get Financially Organized
Here’s a confession, straight from the mouth of a financial writer. I spent three hours trying to dig up a tax return from 2014. Three hours. (And yes, I realize 2014 wasn’t even that long ago.)
Not only did I not save it for my records, but I didn’t even remember the tax program I used to file. Please, don’t judge me.
Through this infuriating debacle, I realized how inept my financial organization skills actually are. Now I fully understand why finding this vital paperwork before you’re on a closing deadline is so important.
The other thing is, you never know what exactly you’ll need. Or, for that matter, why you'll need it. In my situation, credit card balances were irrelevant, but proving I didn’t own any of my previous rentals was vital.
So take my advice and get organized in ways you didn’t even know you needed to be organized. You’ll thank me for it later.
Shop Around for Everything
I was fully prepared to take one of the first quotes for homeowner’s insurance I received. It sounded like a pretty sweet deal! Then, my dad convinced me to call his insurance company instead. (See, our relationship has grown up from trash day reminders.)
That quote was half the price of the original, with additional coverage.
Whether it’s realtors, lenders, loans, or homeowner’s insurance, the advice is all the same: shop around. And then shop around some more. The peace of mind it will give you after making a final decision is worth it.
Don’t Assume One Size Fits All Home Buying Advice Will Make Sense for You
After applying for a loan, I was offered four different options. These options varied in terms of upfront costs and monthly costs. The monthly costs were minimal (a difference of $50-$150), but the difference in upfront costs was substantial. Think $9,000 compared to $18,000.
Before this point, I always assumed it was best to put 20% down. But after seeing the different loan options and taking into consideration how long we'd be in the home, a larger down payment and smaller monthly cost didn’t make sense. In fact, it would take more than five years to recoup the upfront costs and reap the benefits of a lower monthly payment if we made a large down payment.
Instead, I plan on taking the portion of the down payment I opted not to use and adding it to my SEP IRA contribution for the year. For my particular situation, that simply makes more sense.
Consider your particular situation carefully instead of giving in to one size fits all advice. When there are so many factors at play, it’s a necessity.
The Bottom Line
Aside from the excitement of officially becoming a homeowner, there’s a bit of pride in saying I navigated the process of purchasing a home - and came out unscathed on the other side. Minus the tax return debacle, I think I’m on my way to being a full-fledged, financially competent adult. At least I hope so.