What You Should Know Before Buying a House

Welcome to Don’t Retire Graduate. The podcast that asks you what you wanna be when you grow up so you can graduate into retirement with purpose and passion. I’m your host in valedictorian, Eric Rotman. Welcome to office hours where we answer listeners questions about personal finance retirement readiness and more. We received a question from Oliver who asked, what should I know about finances before I buy my first home. and Oliver, I I love this question, and I especially love that it has the word before in it. And it’s not what should I know about my finances now that I’ve bought my first home, and I’m feeling panicked about it. So well done for thinking ahead, and thanks for your question. Before you buy a home, you have to understand not only the costs of buying a home, but the the cost of keeping it maintained, keeping it furnished, and and all the various taxes and and other things that come with homeownership. What I think a lot of young people do, particularly, is when buying a first home, they look at their mortgage payment and they compare it to their rent payment And they say, well, the mortgage payment’s about the same as the rent payment. Therefore, I can afford this house or this condo or this townhome. The reality is that’s not entirely true because when you’re in an apartment and you’re renting, whatever the rent is, whether it’s a $1000 a month or $4000 a month, when you’re renting an apartment and something breaks, you generally don’t pay to fix it. You make a phone call and you say, I need a new dishwasher. or I need a a a new clothes dryer or whatever it is. And magically, one shows up in the next couple of days. When you own a home, everything that breaks is your responsibility, not just inside the home, but also on whatever property you own. So suddenly you’re talking about potentially landscaping or a driveway or a roof or windows or other things. You also have to furnish a home, and most people will furnish a home they own differently than they furnish an apartment. When you when you get an apartment, you might put down area rugs and you’ll buy sofas and and tables and lamps, but you may not be doing, flooring or updating kitchens or, or doing wall coverings or any of those kinds of things or window treatments that you would do with a, with a home that you buy. So As a rule of thumb, and for anyone who listens to this show, you know, I generally don’t like rules of thumb, but as a rule of thumb, people tend to spend about 30% of the price of a home to appoint it and make it their own. So if you’re buying a home that’s $300,000, you can expect to spend roughly $90,000 to furnish it and make it yours, and do all the things that you need to when you move in. Now if it’s new construction, maybe that not as much of an issue because you can choose some of those, some of those things along the way, although you pay a premium for that as well. So that’s first. The other thing to know in addition to can you afford the payment and the upkeep is, do you have an emergency fund in a war chest for when things do go because invariably they will. there was a there was a, an old movie called The Money Pit with Tom Hanks in it that that was really about this house that just kept costing money and everything went wrong. and that actually is more true to life then then you know that you need a plumber and you need a carpenter and you need electrician, you need all these people. And or you have to be awfully handy. So if you’re good at these things, that will certainly help. So have an emergency fund. Typically, 3 to 6 months, make sure that you have that ready to go. And when you buy your 1st home, it’s not just the cost of the home and the down payment. You also have to look at how you’re financing it. are you putting down 20 percent to avoid PMI, which is mortgage insurance, mortgage insurance is the single worst deal ever because you’re paying a premium as a homeowner, a borrower, you’re paying a premium to protect the bank against you. You’re literally paying their insurance premium in case you have a a a failure. And so if you can avoid that, it’s incredibly important. And that means having a larger down payment in most jurisdictions. So have 20% to put down. Make sure you can afford the mortgage and structure it in a way that it’s likely to be continuously affordable. and then make sure you have money on the sidelines, not only to decorate, but also to deal with the what ifs, the things that happen in life because invariably they will. renting and versus buying is is something that everyone has to deal with. And and as I’m sitting here in the middle of 2023, interest rates are higher which means borrowing costs are higher than they’ve been for close to 15 years. historically, they’re not high. They’re sort of within the range of normal over the last 50 or 60 years. But over the last year, over the last year and a half or so, interest rates have gone up a lot. And so cost of borrowing is higher than it was. one other thing to consider is that historically, the idea was buying a home was better idea than renting because you could deduct your mortgage interest. The challenge is that under some tax laws that passed back in 2020, Most people, 90% of Americans don’t even itemize their deductions anymore, which means you may not be actually able to deduct your interest at all because you might be taking the standard deduction. And while I don’t wanna get into a a CPA debate, If you’re doing your own taxes or if you have a tax adviser, make sure that if you’re counting on a tax deduction for your mortgage interest, that you can actually deduct it. So, Oliver, I hope that was helpful. It’s it’s really it is a lot to think about. buying a home can be a wonderful experience and The the last thing that I will tell you in terms of, of this because you asked about finances is when you buy a home, typically, make sure you plan to be there at least 5 to 7 years. I know there have been some extreme swings in prices over the last 2 decades or so, but usually they plodd along a little bit. And because of the closing costs, the cost to buy and the cost to sell, if you’re if you’re moving regularly, sometimes renting is actually better. So, make sure you understand how this works. Talk to your financial advisor. Talk to your accountant. and, I wish you luck and happy house hunting. It is a, slightly stressful, but incredibly rewarding, and exciting time. So I wish you well, and thank you for your question, Oliver. If you’d like to send us a question, which we might answer on future episode of office hours, posted on our Facebook page or tweet us at Rotman Planning. I’d like to thank all of you for listening today, and we’d love to hear from you. So please leave us a message or leave us comments on don’t retiregraduate.com or any of our social media sites. You can also leave ratings and reviews on your favorite podcast platform Those are priceless to us and we appreciate them. Thank you for coming to office hours. Please be sure to tune in for new content every Thursday. For now, This is your host, Eric Brotman reminding you, don’t retire, graduate.