If you Google "First time home-buyers help", you'll be swarmed by articles and advertisements claiming to have the answer. They fight for your attention, like two dogs playing tug-of-war with a rope and you're the rope. You feel pulled between a lot of different "answers" and "solutions". They're not all bad, but they often don't cover the entire process. You get served a meal, without an appetizer. I'm going to serve you the appetizer and explain today how you can prepare to buy a home. In this post, you'll learn about what you can afford, how to save for for a home, and how long it will take.
I broke down the process into 4 simple steps. If two people went through these 4 steps individually, they both would come out with different answers. My point being, these steps are tailored for you and your situation. They're not hard-rules, like a lot of financial-guru's preach. I like to keep things dynamic and adjust to your situation. So, let's get started!
Step 1: How much can you afford?
I want you to head over to Chase's mortgage calculator. Then, fill out the form like this:
I filled out this form for a hypothetical couple that makes a combined $90,000 per year ($7,500 per month before taxes). This couple pays $300 to debt each month. They chose to have a 5% down payment.
Don't worry about the results yet, just fill out the form :)
Step 2: What's your timeline?
Next, what's your timeline? Your timeline isn't when you want to move into your home. Rather, it's when you want to have the available funds. Most likely, you'll move into your home 1-3 months after you save the enough funds.
I recommend choosing a time span, i.e. not a target date. It makes the math easier. So, for our hypothetical couple, let's say their time span is 2 years. If you want to, you can choose a target date. For example, "I want to save enough for a home by January 1, 2021."
Step 3: Calculate!
Alright, now for the fun part! There may seem like a lot of steps, but I purposefully broke it out to keep things simple. I'll first summarize the steps, then show you how our hypothetical couple would calculate it. If you're not the greatest at math, I'll help you out. Just message me.
Now, let's go through these steps for our hypothetical couple. Remember, our couple makes a combined $90,000 per year, with $300 debt payments per month.
Step 4: Make adjustments
We're finally ready to make some adjustments if needed! If your Monthly Savings is way too high, you can make adjustments in a number of ways. You can make your debt lower (i.e. lower your Monthly Expenses in the calculator) and it will lower your Monthly Savings. You could do a 20 year mortgage, or 30 year mortgage, and it would lower your amount. If you changed this, you would also have to change your interest rate to something higher. You would also be have to buy a home less than the new estimate.
Really, you probably don't need many adjustments. You will be in a very good spot financially if you just generally follow steps 1-3. They'll already be customized for you, since everyone has different numbers and goals.
Things are looking a lot better for my refinancing. I'll explain the story in a future post once I get through the end. I expect the end to occur within a week and hopefully it's a happy one, but it got me thinking. A lot of people make a financial decision they're not proud of. Actually, I would say we all have at one point and most of us are probably living in one. Also, sometimes you can't undo that financial decision.
I am in that situation now. I teach the 25% mortgage payment method. In other words, your mortgage payment should be no more than 25% of you take home pay (this rule can and should be applied to rent). Though I teach it, I didn't follow it. My mortgage payment is well above 25% of my take home pay. Nobody is going to perform their financial journey perfectly and I'm no exception. So, what can I do to fix the mistake?
I first considered reversing the mistake I made, but I based it purely off the numbers. My home value was about the same. I could maybe make $5000-$10000 more off it. Assuming average case (about $5000), I ran the numbers and considered new closing costs for selling this home and getting a different one. The numbers did not go well and they clearly showed I should not sell the home.
My next consideration is what I would recommend to a lot of people. If you can't reverse your financial mistake, make it the best wrong decision you've ever made. This is how I and my wife are approaching our home. The home was is a great house, but the price was not as good. We're making it right by refinancing, which increases the mortgage just a little bit, but it keeps so much more money in our pocket, which can be seen month-to-month when we calculate our net worth. It's also likely that our salaries will increase, which would get us closer to the 25% rule. Once the PMI drops off, we'll get even closer.
Our situation will naturally improve over time, but yours might not. If you don't expect your situation to improve, still make it the best wrong decision you've ever made. Just use this best wrong decision as a bridge. A bridge to what? A bridge to reversing the decision. If it's not going to naturally improve, you'll have to eventually undo the decision. It's a hard decision for some, but it needs to be done.
The most important thing for us all though, is learn. Learn from the financial mistake and don't make it again. For me, I need to follow the 25% mortgage payment method. It requires sacrifices, but they pay off. Every financial sacrifice you make will pay off later and even better. I promise you, with a little patience, you'll never regret the sacrifices you make.
Thanks for reading Better Budget! I hope if improves your personal finances become better. If you have any questions at all, please reach out to me. I'll be happy to answer any you may have. Have a great weekend!
I was thinking today, what financial methodology do I want Better Budget to have? Well, I think I've figured it out. The Better Budget methodology has one simple goal, to make the best decision where the outcome results in the biggest gain. Simply put, what decision will make the most money. It might seem like any other financial methodology, but there are a few more things that set Better Budget apart.
Better Budget is not a static plan. It's fluid and adapts to each person's situation. Consider paying off debt and you'll find several different strategies. I don't teach that one strategy is the one you must take, rather I analyze your situation and make a recommendation. If you struggled with finding motivation, I'd recommend the snowball method to pay off debt. If you're really driven, I would recommend the avalanche method to pay off your debt. This is a simple example and I would consider so many more aspects, but it illustrates the point. Better Budget methodology is a plan for you. It's a plan that adapts and will be different from person to person, but the underlying goal remains the same... to make the best decision where the outcome results in the biggest gain.
There's more. I want Better Budget's methodology to focus on averages and never speculate. Have you ever heard of the saying that history is the best predictor of the future? Well, this is another aspect that drives Better Budget. When I'm trying to figure out the best decision for a certain financial situation, I always use averages. For example, the average home value growth in the United States is roughly 3%. So, what is my home worth in 30 years? Using a compound interest calculator, my home would be worth about double what it is today. I don't take the best case scenario, nor do I take the worst case. I make a decision based on the average, then adjust for any differences that come.
Of course you'll find, Better Budget Plan is no more than a methodology at this point. I have a goal to someday write a book, outlining the plan. But for now, I would like to just simply help you go through the plan that I have gone through myself, because I promise you, it works. It's worked for me and my friends and it can work for you too. If you're interest in trying out the Better Budget Plan, please contact me! I'll help you get started for free. I just want to help!
As you may have read, I am in the process of refinancing my home to a 15 year mortgage. I submitted what seems like 1000 documents to the bank. Finally, I got conditionally approved. I also got the appraisal done pretty quickly, in about a week from the initial phone call to receiving the appraisal, but this is where a problem occurred. My home appraisal came in lower than what I originally bought the home for a few months ago.
This was obviously incorrect, but I need to prepare for the worst case, where it prevents me from being able to complete the refinancing. If I can't get the appraisal corrected, what should I do? I thought about this question a lot. This refinancing was to reach my goal of paying my home off early and with little interest. I have to remember this goal when I'm figuring out what to do next. What could I do next to make sure I can reach my goal just as quickly as before.
My first consideration was to just pay my mortgage I have now like it's a 15 year. This would be a good step toward my goal, but it doesn't completely achieve it. This solution forgets to consider the interest part. If I paid my 30 year mortgage as a 15, I would pay about $180,000 in interest. This is a big improvement over the $420,000 of interest for a 30 year. However, comparing it to the refinancing terms, it's about $50,000 more. So, in other words, if I were to refinance, I would only pay about $125,000 in interest. I'm not happy about this difference. Also, my monthly payments would be significantly more with this plan. After refinancing, my PMI would drop about $75 per month. Also, the overall payment would drop. Paying my 30 like a 15, I would have to pay about $4100 per month. If I were to just refinance to a 15, the payment would be about $3800 per month. Obviously, this solution isn't the best.
Another consideration I had was to go with the previous option, but try to cover some of the extra costs. My first thought was to rent my basement, but the problem is I don't have a bathroom down there. Another problem with this solution is my laundry room is also in the basement, so I would need to figure out a way that could still be accessible, while keeping the rented space separate. I think the renovations that this option requires would be too much money and effort. I also think it would devalue the home (maybe this is what the appraisal was trying to predict lol!).
This is kind of another consideration, but related to the last. I could also cover some of the costs through investing in dividend stocks. I have a few dividend stocks that I invested in primarily because they pay out somewhere between 10-12% in dividends per year. If I wanted to truly treat my 30 year mortgage like a 15, on the new refinancing terms, I would need to lower my monthly payment from about $4100 to $3800, about a $300 difference. Yearly, I would need about $3,600. To get $3,600 per year, I would need to invest about $40,000. This would give me estimated $3,600 per year, after taxes. This is a solid option, but not completely doable. I don't have $40,000 available to invest, first off. Also, in a way I'm using the $3,600 extra per year for the extra interest I need to pay, since I wasn't able to refinance to a 15 year. I would rather use that $3,600 on something else, like a nice vacation with my wife.
The last option I've considered was to just reset. I'll give it a month or two. This gives me time to build up a little more equity in my home. I could also get a different appraiser, that could more accurately price my home. The rates might be different, but this doesn't necessarily mean they'll be bad. There's a chance that they could be better than now and a lot of analysts think they will be. I'm out $500, but I got an offer in the mail yesterday where if I switched banks to citizens bank, they would give me $500. So, then I would be back to even. My credit score might be affected, but I really don't care about my credit that much. After my mortgage is done, I won't have a credit score anymore.
With all things considered, my first priority is to try to get my refinancing to go through. The lower appraisal doesn't affect my net worth, but just forces me to tie up more money than I would like in my home. It would drain my accounts, but only for a little bit. I'm not happy to be in this situation and I'm not exactly sure what I'm going to do yet, but I'm working hard to figure it out and I think I have some good options.
Maybe you have an idea about what I could do? I would love to hear from you, you just need to message me! I'm thankful you took the time to read Better Budget. I hope you enjoyed this post. If you have any questions at all, or want some help reaching your own goals, please reach out to me! I really want to help you with your personal finances.
My parents will tell you, I was full in on the 100% down payment plan. I was going to live in their basement for years and mooch off them until I had enough for a home. I'm glad I didn't go that route and I'm sure they are too. I was against all debt, period. It didn't matter what kind of debt it was, I was against it. However, my opinion has changed about debt, but not drastically.
Let's just say, I'm okay with mortgage debt. The only other debt I'm considering changing my stance on is debt to obtain appreciating assets. I haven't clarified my view on that yet, but I've been thinking a lot about it. That's for another post though. Now, we're focusing on mortgage debt. The only debt I'm okay with and here's why...
Your mortgage debt is backed by an appreciating asset, i.e. your home. So, if you can't pay your mortgage, you just sell your home and you'll likely make a profit. Because of this, your risk is lowered and if you set up your emergency fund correctly, you could even go a few months paying the mortgage bill without a job.
This is only half of it though. Another reason I'm okay with mortgage debt is something I explained quickly in a previous post. I look at a mortgage payment in two parts: the rent and the investment. The investment is the easiest to understand, it's simply the principle paid each month. Then, everything left over is the rent (e.g. taxes, insurance, and interest). I call this rent because it's the cost of acquiring a residency.
For example, my mortgage is roughly $3170 a month. I'm currently on a 30 year, but switching to a 15. This is how it breaks down monthly (average over first few months):
Looking at it this way, I now ask myself, would a $2651 apartment be better for me and my wife? I'd then invest the $519 a month, which would actually get better returns than if it was invested into a home. After all things considered, renting wasn't the right decision for us, but now you can see how a mortgage is split into two parts: the investment and the rent.
You'll find that a lot of people who are totally against debt (think Dave Ramsey) are okay with a mortgage. It's because you're going to be paying rent one way or another, but a cool thing you can do with mortgages is lower your rent. The best way to do this is either make additional payments, or switch to a 15 year mortgage (or something even lower). This will also increase the amount of money invested each month.
If you don't fully understand how to look at a mortgage in two parts, please message me! I really want to help you understand, because it will improve your personal finances.
One of my goals with this blog is to give me an avenue to helping people with their finances. That's why every post I encourage you to ask me a question! I hope you enjoyed reading Better Budget and it has helped improve your personal finance journey.
Better Budget Co
Your guide to all things personal finance. We're big fans of goal getting budgets, debt fee living, and a good cappuccino.
My name is Corey and I have a passion for budgets and personal financing. I can talk about it for days (weirdly enough). Hope you enjoy the blog!
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