What I have learned buying a house

Buying a house is a big deal. Next to marriage, kids, and job it might be the next in line regarding big life events that determine the course of history for you and your family.

Buying a house exclaims many things, perhaps none more than: ‘Of all places I could live (in the US and even the world), I choose these coordinates! It is here where we will make memories, sow, reap, and dwell’. I could go on philosophically here…I won’t….rather, I want to share some practical things I am learning that can be broken down into a few categories.

My context:

  • Young 30’s + Wife + 10 month old child (4 months old when we moved)
  • I bought a townhouse when I was 25 (in 2006, worst time ever) in Alpharetta, GA. Lived with some dear friends for years to help me afford the place.
  • I have been at my job almost 10 years and have enjoyed a consistent, lively career thus far
    • I say the above because it comes into play on the finance side of things
  • Zero debt outside of my home…no cars, college, or crud that I am stuck paying off.
  • I am not in the 1%….meaning I am not making crazy money. Yes I make good money…so coming from that ‘opportunistic perspective’ is a privilege and I realize that.

Whats the best formula for finding out the true cost of owning a home? No clue….but I did lot-so spreadsheets to help me make my decision, etc. Here are some of my tidbits:

    • Items to Add up
      • Mortgage (www.mortgagecalculator.org/)
      • Property Taxes  – I like to do this line item outside of my mortgage and base it off public record vs a calculated %. You can likely find this on realtor.com or zillow.com in the taxes/historical section. Trying to figure out assessed value, etc is too complicated for the average person like me.
      • HOA Fees  – Likely offsets some other fees depending on what kind of community live in (perhaps pays for trash, water, lawn, pest control, etc)
      • Insurance – Most policies are written with a $1,000 deductible…I find this is too low of a deductible because to me something has to be pretty major for me to want to involve insurance.
        • Going from $1,000 to $5,000 deductible with the same coverage cut my insurance bill in 50%. I upped my coverage and lowered by deductible.
      • Variable Expenses
        • Electricity – I used this in my calculation because I was looking to buy all kinds of houses…. 1980-90’s construction, build new, or recently built. There is likely a $100ish difference in electricity costs between and older home and a new home
          • Quick math – With interest rates at 4% your payment on $25,000 is $119 a month. IE…buying a newer home may save you $119 a month in monthly bills therefore I could justify $25k more in home budget. I would rather put money into an asset than used energy.
          • Plus its greener
        • Lawn care – $100 a month for 1/3 or 1/2 acre homes.
          • Mow your own lawn! Saves money and is actually fun to do if you have an intense job and need some down time.
          • +Want a green lawn? That costs another $300-500 a year based on size to fertilize and fight weird stuff off
        • Water – $50-$100 a month depending on where you live
        • Trash – Covered in some property taxes (my case) but another $30 if not.
        • Pest Control – sneaky expensive. $20/mo for termites + $20/mo for other things that crawl.
        • Things will break…eventually…add $100/mo to your calculation
    • Items to Deduct from that payment
      • Tax Incentives – You basically save 30% on all money paid towards interest + taxes.
        • Quick math. Lets say you pay $500 in interest a month for your mortgage and $300 a month in escrowed taxes….totaling $800 a month x 30% = $240. You will have a tax credit of $2,880 at the end of the year which is real dollars back in your pocket. The more expensive the home the larger effect this has on real dollars back in your pocket.
        • If you live pay check to pay check you should not use this in your calculation as it won’t help you get by in the moment.
  • Below is an opportunistic calculation but I did it to help me think through it. If you want to live in a desirable area it likely means that home values are increasing with the every 7-10 year setback/reset in price. In the end, it all goes up…either due to demand or inflation.
    • I predicted a YoY (year over year) increase in value of the house for 3%. This is compounding…so: (use a compounding interest calculator – http://www.moneychimp.com/calculator/compound_interest_calculator.htm)
      • $100,000 house in 5 years will be valued at $115,927
      • $100,000 house in 10 years will be valued at $134,391
      • So in 10 years if I sell the house I can basically offset the true cost of owning the house by $34,391 for every 100k of value.
      • This is dangerous given the 2008-2012 years, but I think 3% in a desirable place is a safe bet given the area I am looking to buy (Alpharetta, GA)
      • If you live in a place that is declining (manufacturing town USA) you may want to reverse this math to find your true cost -scary! but perhaps your job/great salary will offset this cost and that is apart of your calculation
      • Should I buy now? This logic helps you decide whether or not you can afford the same house in 5-10 years and if you can save the delta over that time.
      • If I get a loan today for $1 in 10 years I theoretically owe less than a $1 since my wage has likely gone up with inflation/cost of living increase. Once again, an opportunists angle at things.
  • Schools – This is a pregnant conversation…but if it comes down to it, is your kid going to get a ‘good’ (defined many ways) in the local public schools? If not, need to adjust that into your calculation…not uncommon for private school bills to be $1,000+/mo per kid. Yikes!

Am I emotionally prepared to buy a home? 

  • Given the intro to this blog you can tell I definitely took an emotional account of where my family was and what we wanted. In the end we LOVE the area and wanted to stay here for many years to come. We wanted to ‘double down’ both financially and emotionally.
  • Given the financial context above, what am I willing to justify emotionally that doesn’t make sense financially? Bring friends into this conversation and ask for their wisdom as its very hard to look objectively at this decision. (Facts lead to conclusions, emotions lead to decisions!)
    • I had in depth conversations with 3 wise people about the following: How much money I make, how much debt I have, how much the house costs to make sure that this decision passed their sniff test. I kept them all in the loop often as I wanted to make sure I was leading my family the right direction.
  • Does your spouse support the decision? If yes, great! Keep them in the loop on your emotion + logic. If not? Then drop it and ask if you can bring it up 1x a month for conversation.
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