The other day a reader emailed me this:
i would love for you to do a post on what you think about real estate – your blog seems to announce that you do not ever want to be in debt, and i was wondering what your future plans for renting/buying are!
That is an excellent question. Honestly I haven’t put too much thought into it because I probably won’t buy a house for years. My financial priorities go like this:
- Save $10,000 in an Emergency Fund (circa Dec 2010)
- Max out Retirement Accounts (2011 and on)
- Save for a Wedding (2011)
- Save for a New car (2011/2012)
- Save for a House Deposit (2012-??)
Man! That seems like a loooong time! :( Perhaps I can knock out the first goals faster than expected? Hmm. But back to the question at hand: While I am very much against debt, I do plan to take out a mortgage when I buy a house. I’d love to buy a home with cash only (can you imagine?!) but realistically that probably won’t happen unless I win the lottery or marry rich.
I’ve got a little time before I will be saving for the deposit, but here are my debt-free thoughts on mortgages for when that time comes.
1. Rent Cheap
A lot of people have the mentality that renting is wasting money because you are throwing away cash that could be put towards equity. Well, that is technically true, but it can be a dangerous mentality if it rushes you into buying a house you can’t afford. It is, however, a good motivator to save faster and the easiest way to save faster is to rent cheap. I think that monthly housing costs should be no more than 35% of your paycheck. My rent right now is 26% of my paycheck (33% if you count bills) and I hope to stay around that no matter where I live. You don’t have to live in the ghetto to rent cheap, but some ways to save on rent include splitting rent with a roommate, renting away from city life (make sure to factor transportation costs), and sacrificing amenities like washer/dryer, dishwasher, etc. That topic really could be a whole post in itself.
2. Save 20% Down Payment
Mortgage lenders vary on the amount of cash they require for down payments, but I plan to save for a 20% deposit when I buy. It is so hard to imagine saving that much money! But like I said in an earlier post, buying a house really intimidates me, so I want to make sure I have enough money up front to cover house expenses as well as a good deposit. This amount depends on the location, but for example, if I buy a house that is $250,000, I plan to save $50,000 to put down. (Yowser!! That’s a ton of money! Hopefully by then I’ll have a husband to help me save.)
3. Buy a house with a 15-year mortgage
I am sure many may disagree with me, but I plan to buy a house with a 15-year mortgage rather than a 30-year. The amount of interest saved between those 15 years is huge! The payments each month may be significantly larger, but if I’m unable to afford them with a 15-year mortgage, then the house is either too expensive or I’m not ready to buy one. If I purchase a home at the age 30 then I could be 100% debt-free by the age of 45 as opposed to 60. Can you imagine not having any housing payments at the age of 45?! That would be AMAZING!
So those are my very high-level thoughts on real estate. Dave Ramsey is my go-to man for most of my real estate questions and advice, so I encourage anyone looking to buy a house to check out his website. I don’t agree 100% with everything he says, but I did follow his example for this one. :)
What about you? What are your thoughts on buying a house?
If any of you are saving for a house, do you have a different strategy? If any of you have bought a house, would you recommend a different approach? Suggestions welcome!