Our second question of the month comes in from Anonymous from our Thriving Families Facebook Community:
Should we wait until we're debt-free in order to buy our first home knowing that we'll be renting for at least the next two years?
My family consists of myself, my man and his 14-year-old son. Our original plan was to become debt-free by August 2021 and continue renting up until his son graduated high school in summer of 2024 and theoretically moved out.
From there, the idea was to travel the world and see what speaks “home” to us before purchasing our first home. Recently, however, both my man and I have gotten new jobs that we both love and are more or less local so we’ll be rooted deeper in our current location. Thus, we've started considering buying a home that we’ll be in for at least the next four years that costs similar to what we're currently paying in rent when all things like Private Mortgage Insurance (PMI) are considered.
Issue #1: Time
If we were to purchase our first home, we think that it would be best to do so this summer for 3 reasons.
- Our current lease will be over at the end of this September.
- Our son will be moving from middle school to high school and it will be the best time for a transition such as this and so we would allow him to help us move.
- My man will be passed the 9 month period for his new job and I'll be still working at my salaried stable day job that I've been at for the past 6.5 years. That will look excellent on paper especially given that I'd love to swap out my day job with my new job which is commissioned based. That would take a lot longer and more paperwork to make a case for home buying.
Issue #2: Money
We have most of our bases are covered for insurance and retirement, but we don't have any down payment saved up. We only have $1,000 making up our baby emergency fund and currently have all of our excess income going towards debt. I qualify for a 100% down payment assistance and also have a solid 401k to pull from. Though I'm not too keen on borrowing from one investment vehicle in order to pay for another.
What do you think?
Should we buy a home this summer or stick to our original plan?
Thank you so much for connecting in the Thriving Families Facebook Community.
I completely understand your desire to buy a home right now. You’ve been renting and you’re feeling like your current community is one you’re going to be in for a while. So why pay rent when you could be paying the same amount of money on a mortgage, right?
Well, I want to give you 7 reasons why I think you should wait to buy your home.
1. Zero Down Payment Loans Can Be Dangerous
With a Zero Down Loan, you’ll automatically be paying PMI (Private Mortgage Insurance). This is an additional cost on top of your monthly payment that can add another 1% to your mortgage. So if you have a $200,000 mortgage, you’ll be paying an additional $2,000 per year (or $167 per month).
Also, if for some reason, the value of your home goes down, you could be underwater on your home and feel really stuck if you want to eventually sell. I went through this with my first home and it was horrible. I felt stuck in my home for 5 years. And it's no fun to feel stuck.
2. Little Emergency Savings Can Cause Big Problems
Homes can be money pits.
When I bought my first home (and I had very little savings), the AC broke, my roof needed replacing and my basement flooded. This was all in the first 2 years!
So what did I do? I started borrowing more money to fix everything. This put me in a hole for quite a while.
I don’t want this to happen to you.
3. Furnishing a Home Can Be Costly
When you buy your new place, you’re going to want to furnish it and make it feel like home. With very little savings, you’re not going to be able to do this or you’ll end up further in debt to make it happen.
The other option is to not furnish and decorate, but then it might not feel quite like home.
4. Home Maintenance is Time-Consuming and Expensive
With no landlord to cut the lawn, fix the broken appliances and clean the gutters, you may find yourself with a lot of extra ‘to-do’s’ each weekend.
You could hire out this work and get it done faster, but that will be additional costs you’ll have to incur.
5. Closing Costs Still Need to Be Considered
Even with a zero down payment loan, you may still have to pay 3-5% of the purchase price in closing costs. These costs and fees can include:
- Application fee
- Broker fee
- Discount points
- Title insurance
- Prepaid homeowners insurance and taxes
- Document preparation fee
- And much more!
If you're buying a $200,000 home, you may still need to come up with $6,000-$10,000!
In short, even with a zero down payment loan, you may still need to pay some money upfront.
6. Your Debt Pay Down Process Will Be Stalled
Instead of getting out of debt, you’ll be taking on a lot more of it. And with the additional costs of being a homeowner, you may lose traction on paying down your debt completely.
It feels like you're so close to accomplishing your goal of debt freedom. One more year and you're there!
Related Interview: Tiny Home Living and Minimalism Are Helping Us Become Debt Free
7. New Homes Can Add More Stress
You have two jobs and a teenager at home. Add on top of that the burden of taking care of a home and the maintenance that comes with it, this could be a recipe for some major stress in your life.
As you’re making some traction in your career and finding work you love to do, I’m fearful this home purchase could be more harm than good for your mental health.
When to Consider Buying a Home
So you might be saying, “Okay fine, Andy. Maybe buying a home now isn’t the best time. When should we consider it?”
To that hypothetical question, I would say that when are able to do the following:
- Put a 20% down payment to avoid PMI
- Eliminated your high-interest debt (think about the double-digit percentage stuff like credit cards)
- When the mortgage payment is not more than 25% of your household income
- Have at least 3 months of expenses saved in an emergency fund (because there will be emergencies!)
- If you and your partner on the same page with the big purchase
It’s never fun to tell someone they shouldn’t buy a house, but going through this life-changing process when you’re in debt with little to no savings can lead to a lot of unneeded stress.
I’ve bought two homes in my life. My first one was a nightmare and the second was a dream.
I hope when you do buy your home, it feels like a blessing and something that you love.
Awesome analysis. What I liked best was, after explaining why it would not be the best idea to buy a home in this particular couple’s situation, was the answer to the question of when IS the right time to do it. That’s just as important of a question to answer as the couple’s original question. Thanks for a great article.
Absolutely S.R.! Thanks for dropping in to say hey!
I hope it helps Anonymous.
Couldn’t agree more… this does not sound like an ideal time for this family to buy a home. We have found you need to have enough funds to cover the 1000-2000.00 expenses that just crop up… leaking chimney flashing, crumbling driveway, routine plumbing surprises. Don’t want to have no equity and be going into debt on repairs at the same time.
There are so many unexpected costs that pop up. You are right.