Several years ago, my wife and I were in a bit of a personal bind. We lived together in what was about the tiniest two-bedroom apartment you can imagine, with a small baby and another one on the way. We were already forced into being pretty creative with arrangements with even one baby in the home, but two? It was pretty clear that we needed a bigger place. This post originally appeared on The Simple Dollar.
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We considered a bigger apartment, but there were honestly none available that were even remotely reasonably priced in the location that we wanted (roughly midway between our two jobs), and my wife didn't want to live in the city near either of our jobs. With that, we started house hunting. And, to be honest, we somehow managed to stumble into a pretty good house for our needs at a fairly reasonable price.
Looking back, however, I recognise that we were able to find that house due to pure, unadulterated luck. We did many things wrong during our house search, our move and our early days of home ownership.
If I somehow had it to do all over again, I would have made some smarter decisions and considered some things that I didn't pay any attention to. But, unfortunately, I don't have a time machine.
Instead, here are the 12 things I most regret not considering or doing during the whole process of moving from an apartment to a house. Perhaps they will find their way to someone in the same situation I was in 10 years ago.
1) An Apartment Offers More Benefits Than You Think
It is really really easy to get caught up in the glow of all of the potential benefits of home ownership. You can build equity! You don't have a landlord skulking around! Once you pay off that mortgage, you won't have any kind of monthly payment any more (well, you'll still have property taxes and association fees and insurance…)! You can do whatever you want with the property — if you want to knock out a wall, go for it! If you want a fuchsia room, go for it!
The thing is, there are actually a lot of benefits to living in an apartment that people tend to overlook due to a "grass is greener on the other side" effect.
For starters, when you live in an apartment, you don't have to do maintenance on the property. If something goes wrong, call the landlord. If it's your house, you're either going to be fixing it yourself or calling a repairperson and, in either case, you're going to be spending money on parts (at the very least) and labour (if you bring in help).
For another, tasks like mowing the lawn and cutting weeds and trimming trees aren't even on your radar. They're just taken care of. You don't have to spend the time on those tasks or pay for the equipment required. Those things all mean expenses when you're living in a home, expenses that people often don't look at when they compare a mortgage to apartment rent.
Before you ever consider buying, you really should spend some serious time looking at a good "rent versus buy" calculator, like this one from the New York Times.
You need to run the numbers over and over and over again and make absolutely sure that the financial benefits you're getting from buying a home are greater than the financial benefits you're getting from renting. Looking at the raw numbers removes the emotions and the "grass is greener" factor from the picture.
2) A 20 Per Cent Down Payment is Incredibly Important
If you don't have a 20 per cent down payment, you are going to wind up handing a lot of money to the bank to make up for it.
Here's the reality of the situation: If you come to a bank without 20 per cent of the cost of the home you want to buy already in hand, the bank is going to see you as a risk, as someone not serious about buying a home, as someone who might dump a house on them after not making many payments which leaves them swallowing almost the full cost of the house if they have to foreclose.
What the bank will do is not give you a loan unless you sign up for mortgage insurance. Mortgage insurance will amount to about one per cent of the total balance of the mortgage each year; it will be tacked on to your mortgage payment. You can essentially think of mortgage insurance as adding a +1 to whatever the interest rate is on your loan — if it's a 3.5 per cent loan, you'll effectively be paying a 4.5 per cent interest rate.
That mortgage insurance is going to stick around until your remaining principal on the loan is less than 80 per cent of the value of the home — and the bank won't exactly be friendly about this, because they won't let you remove the interest rate until they're absolutely sure it's less than 80 per cent of the lowest possible value of your home.
Why do they do this? It's insurance for them against a homeowner — you — who might not necessarily follow through on the mortgage. Why would they think that about you? It's because you tried to borrow a lot of money without bringing much of your own to the table, as demonstrated by not having that 20 per cent down payment.
So, the real impact of not having a 20 per cent down payment is that for the first, say, third of the time you're paying off the mortgage, you're going to be effectively tacking on an additional payment each month, one that will add up to one per cent of the value of the home over the course of a year. If you're buying a $250,000 home, that means your mortgage insurance will cost you $2500 a year until you get rid of it. It's just gone — poof.
You can avoid this entirely by just saving up a 20 per cent down payment, which you can do by being a little bit smart with your money. That's actually really good practice for the realities of home ownership, because to be able to make home ownership a success, you need to be smart with your money. Home ownership is very rewarding, but there are a lot of costs involved, and if you're spending money without much organisation, simply learning how to save and make better choices with your money is vital preparation for home ownership and that 20 per cent down payment savings project is a great way to learn.
3) Location Is Incredibly Important
This is something you likely already understand, but I'm putting it here to re-emphasise it. Location. Is. Very. Important.
Wherever you decide to live, you're going to be commuting from that place to wherever it is that you work. That commute is going to have a cost in the form of both money and time, a cost that is going to be repeated over and over and over again as long as you have that job (and, likely, jobs similar to that one which will probably be in the same area).
If you live close to that area, great! You can walk to work or take a bike to work, which means your commuting costs are practically zero.
If you're a bit further away, you can probably take the bus to work or the subway. You'll have to pay some mass transit fees, but it's still pretty cheap in the big scheme of things.
If you're far away from work, you're probably buying a car. A car is expensive. RACQ estimates that the average annual cost of owning a car in Australia, including all of the expenses (fuel, maintenance, registration, insurance, depreciation and so on), varies between $116 to $332 per week, depending upon the type of car. Ouch.
If you pick a poor location, your commute cost goes up from $0 per year to $17,264 per year. That's effectively tacking $1438 a month onto your monthly housing expenses — and we're not even talking about the time eaten each and every day.
This isn't to say that this should be a deal breaker, but that it should be part of your maths when figuring out whether to move.
4) Shop Around for Your Mortgage and Get Pre-Approved
Sarah and I did shop around on a very limited basis for a mortgage, but our "shopping around" mostly consisted of looking at a few advertised mortgage rates and then quickly selecting a single financial institution to work with.
What we should have done is actually meet with several different banks to discuss mortgage options and see what kind of mortgage offers they were willing to pre-approve for us.
Pre-approval is important. It gives you a dollar amount with which you can safely house hunt without having to go back and get approved. It's effectively your budget for the house hunt.
It takes some time, but spend that time now. It will pay off enormously for you if you are able to find a bank that will shave 0.25 per cent off of your interest rate while pre-approving you. Just getting that little amount is worth many, many hours of bank meetings.
5) Go Minimal When You're Choosing a Home
When you're in the process of house hunting, it's very easy to get blown away by the bigger homes with nicer decor and furnishings. They look good. They're roomy. They shine in comparison to smaller homes with lower quality decor.
The thing is, you're paying for that extra space. You're paying for those nicer elements. You're paying a lot, in fact.
My advice? It's similar to my advice when shopping for anything. Start at the bottom and inch your way up. Don't start by looking at homes at the high end of your preapproval. Start by looking at a bunch of homes at the low end and see if any stand out to you for your needs.
Then, very slowly start lifting the ceiling on your price and looking at more expensive homes if you don't find anything that really stands out to you.
If you start, as we did, by looking at homes that are on the very upper end of your price range (or even out of your price range), you'll find yourself naturally predisposed against lower-priced homes. Your basis for comparison becomes that expensive, gorgeous home that's going to be like a financial weight around your ankle, a home that doesn't represent the best bang for the buck for you (which is what you're really looking for).
Start cheap. Look at cheap homes, then inch upward. You'll know a good home for you when you see it.
6) A 15-Year Mortgage Is Virtually Always a Better Idea Than a 30-Year Mortgage
Over the course of a 15-year mortgage, you're going to end up paying about a third of the interest to the bank that you would pay over the course of a 30-year mortgage. That's because not only is a 15-year mortgage much shorter in length (meaning you're paying more principal each month), it also comes with a lower interest rate.
If that tip is true, why do people get a 30-year mortgage, ever? The reason's simple: Thirty-year mortgages virtually always have a lower monthly payment. Even though it's a poor long-term choice, people often look at the bigger 15-year payment and back away, believing that they're not going to be able to afford it.
Here's the truth: If you're scared of the monthly payment of a 15-year mortgage, then a 30-year mortgage for the same amount is probably also a poor idea. It means that you're buying more house than you can really afford.
Unless you have some sort of incredibly compelling and unusual reason for preferring a 30-year mortgage, you should be getting a 15-year mortgage. If it looks like you can't afford the payments on the 15-year mortgage, then you need to be looking at a lower-priced property to buy.
We got a 30-year mortgage. We managed to pay it off in four and a half years (because we were making triple and quadruple and quintuple payments to try to become debt free). If we had a 15-year mortgage, we would have paid the whole thing off even faster, with even less mortgage given to the bank.
7) Never Go Above Using 40 Per cent of Your Take-Home Pay as Debt Payments
This is a good rule of thumb for financial sanity. Take your monthly debt payments for your already existing debts. Add to that your monthly mortgage payment for a 15-year mortgage. If that adds up to more than 40 per cent of your monthly take-home pay, then you're putting yourself on a very dangerous financial tightrope and you should strongly reconsider buying that home.
This is an example of a foolish move that we almost made, except that we were directly saved from this by a loan officer at the credit union we were working with. The number one figure she worked with in terms of determining our preapproval was our monthly budget and she would not allow us to go above a 40 per cent total debt payment. She preapproved us only for an amount that translated into a loan that was below that 40 per cent threshold.
Without that careful loan officer, we could have found ourselves in a serious mess, as we had been willing to borrow more for a bigger house. We had our eye on a home that was almost $50,000 more than what we were preapproved for; buying that home would have been a giant mistake.
Keep your debt payments below 40 per cent of your take home pay. If you can't do that and also get the house you want, keep saving or turn your sights lower.
8) Flipping Requires a Lot of Sweat Equity; It's Definitely Not Just Pure Profit and Reality Show Fun
One potential avenue of home ownership that Sarah and I discussed was the idea of "flipping" a house. This was during a period where the concept of "flipping" a house — buying it, putting some work into it, then selling it for a profit — was very much in vogue.
It can be a moneymaker, for sure, but it's also a very big time sink. You are going to be putting a lot of hours into such a project if you take it on, and if the house you're flipping is also your primary residence during the process, you're adding even more challenge to the equation.
My later experience with house renovation and flipping taught me a simple lesson: It can go well and be profitable if you know what you're doing and have some good carpentry and handyman skills. If you're lacking those, it's not going to go well — you're going to vastly increase your invested hours and vastly cut back on your profits.
9) You Are Going to Want a Healthy Amount of Cash in Hand When You Move
In the months prior to your move, don't just throw everything into a down payment or into closing costs. Keep some aside for the inevitable bundle of expenses that you're going to discover when you move in.
You're going to find that you need lots of things, particularly items that were previously provided by your landlord. You'll need a mower (or a mowing service). You'll need lots of various tools. You'll probably need some furniture — even if you buy super low-end stuff, you'll still need some. You may need appliances. You may need little things for minor home repairs. You may need food and beverages for the people who help you move and settle in.
Those costs are going to add up, no matter how you slice it. It's a bad move to start off your new period of home ownership with a lot of credit card debt.
So, during those last few months in the apartment, direct some of your savings to be used for those expenses when you first move in. You'll be incredibly glad you did, because if you don't, your credit card will melt.
10) 'Fill' Rooms With Very Basic Furnishings and Upgrade Slowly From There
Your first home will probably be substantially larger than your apartment and you'll find that, when you move in, some of the rooms are awfully... sparse. It will be very tempting to go fill them up with furnishings, particularly places to sit.
There's nothing wrong with that temptation. Just do it smartly.
I highly recommend starting with very low-end furnishings, even secondhand stuff, to fill spaces in your rooms. This will enable you to eliminate that "empty" feeling as inexpensively as humanly possible.
Then, after that, slowly upgrade the furnishings as you see fit and as necessary. If you do it slowly, you can do it out of pocket, without the added expense of credit card interest and without putting your emergency fund or other savings at risk.
11) Adopt a 'One in, One out' Policy From Day One
Once you've settled in just a little and have purchased a few true essentials for your home — basic furnishings and such — adopt a "one in, one out" policy for everything in your home. If you bring in an object of some type, you need to get rid of an object of the same type by selling it.
If you bring in some clothing, you have to get rid of some clothing. If you bring in a book, you have to sell a book. If you bring in a gadget, you have to get rid of a gadget.
Seem strict? Well, the problem is that if you don't do this, you'll rather quickly fill up all of the additional space in this home and you'll be just as cluttered as you were before you moved. You'll also find yourself in a position where it is much more difficult to move, to rearrange things, and to nave a non-cluttered home, and you'll be spending lots of time on maintaining your stuff and finding individual things you need.
Another big benefit of such a policy is that it keeps money in your pocket. You'll become very selective with the things that you buy. You'll spend less overall, and when you do spend money, it will be for quality upgrades, not just mass quantities of stuff.
Keep things simple. Stick with a one in, one out policy. I certainly wish we had done so.
12) Put in the Effort to Know All of Your Neighbours
This is a final, but powerful tip for any new homeowner. Get to know all of the people in your neighbourhood — at least within several houses of your own. Stop by if you see them outside and introduce yourself. Once you're settled in, invite some of them over for a barbecue in the back yard. Built at least a minor positive relationship with them.
How is this beneficial? A neighbour is a person who can lend a helping hand in a pinch. You can borrow things from them when needed. They can keep an eye on your house when you're travelling. They can be a friendly face and a conversation partner at home and can even become a close friend. Of course, you'll reciprocate these things, but the cost for you is much lower than the value of the benefit you receive.
Your neighbours are a lending library, a source for advice, an intruder alarm, a package retrieval aid, an emergency babysitter, a potential lifelong friend and so much more. Don't let that slip by just because of your own busy schedule.
In various ways, we bungled almost all of these strategies while purchasing, moving into and settling into our current home. They weren't conscious mistakes, just errors made because we didn't yet know what we were doing.
After years as a homeowner, I've managed to overcome and fix some of these things. We eventually built good relationships with our neighbours. Our house is cluttered, but we have a "one in, one out" system that's largely in place now. Our house is wholly paid for (though we could have paid for it much sooner).
If I had it to do all over again, though, I wouldn't try to fix these things afterwards. I'd try to do them right from the start. I hope you'll do the same.
12 Things I Should Have Considered More Carefully Before Buying My First Home [The Simple Dollar]
Image by Malte Mueller via Getty.