After living in rented spaces for the first decade of our adult lives, my husband and I were eager to buy our first home. Comparing the cost of renting versus the cost of buying a home in the Midwest where my husband Mike attended law school, we decided there was no reason not to buy our first home.
Mike was more savvy than I was about buying houses (and finances in general), so I followed his lead. And I’m so glad I did!
We actually made some pretty great financial moves as first-time home buyers.
If you are planning to buy a home in the near (or distant) future, some of these moves might sound impossible in today’s market. Read through to the end and I’ll talk specifically to you.
1. We ignored the loan approval amount.
The normal first step in buying a home is getting pre-approved for a mortgage. The pre-approval amount gives an upper limit to the mortgage you qualify for.
It can be tempting to buy as much house as the bank says that you can afford, but we made it a point not to do that.
In fact, I don’t even remember what the loan approval amount was because we didn’t focus on it at all. We went in knowing what our needs and wants were, and tried to spend on the low end of that range.
Don’t let a lender try to tell you what your house budget should be!
2. We made a 20% down payment to avoid PMI
Instead of shopping with a ceiling purchase price (a loan pre-approval amount) in mind, we focused on finding a property where we could put 20% down. In fact, we made a 20% down payment non-negotiable in our search. We wouldn’t even consider any homes if we couldn’t make a 20% down payment.
Since Mike worked for about two years between college and law school, we had some money saved for a down payment. We were pleasantly surprised to find a property where we could make an $18,500 down payment without trouble.
3. We got a 15-year (instead of 30-year) mortgage
Mike was pretty adamant about getting a 15-year mortgage instead of a 30-year mortgage. When we ran the numbers it really was a no-brainer. With a 15-year mortgage our payment was $595. A 30-year mortgage at the same rate would have left us with a $409 monthly payment. So we were paying just a little more each month. The total difference was $186 per month.
I should also mention that that amount was strictly the mortgage payment. We took care of our own insurance and tax bills as they came due rather than having them in escrow, which meant we were holding onto our own money for longer.
The clincher is when you look at the interest over time on a 15-year vs. a 30-year mortgage.
If we had stayed with our $74,000 mortgage for the full 15 years, we would have paid a total amount of $107,000. The same $74,000 over a 30-year loan would have totaled $147,000. We would have ended up paying as much in interest as principal.
But we weren’t there for the full mortgage term. We knew we would only be in the home for four years. On a 30-year loan, over those four years we would have paid $19,632, and over $15,000 of it would have been interest payments, leaving us with about $4,500 of equity.
Under our 15-year mortgage, we paid a total of $28,560, but over half of that was paying down the principal! We ended up with $14,500 in equity instead of $4,500. We did pay about $7,500 more over the four years, but because we also paid off $10,000 more in principal, it essentially gave us an additional $2,500 of equity over the 30-year loan.
It’s actually even better than that though. Choosing a 15-year mortgage also gave us lower interest rate than a 30-year mortgage could. All our 15- vs. 30-year comparisons above estimate an equal rate between the two mortgage terms. Since the actual rate of a 30-year loan would be higher than a 15-year loan, the longer loan would cost even more in interest than shown above. I’m not going to recreate all those numbers now, though.
We even refinanced our home about a year and a half in, which knocked 1.5% off the interest rate. Of course we made sure to look at how long it would take to recoup the cost of refinancing to make sure it would be worth it. It only took a couple of months to earn back the cost of the refi, because the bank subsidized most of the actual costs.
4. We bought with the resale in mind
We knew we would only be in our home for the time it took Mike to complete his JD and MBA programs. In four short years, we would be on the selling end, instead of the buying end. There were many homes we looked at that had quirks that wouldn’t have been deal-breakers for us (we’re pretty good at dealing with quirks, in case you didn’t notice), but may have caused trouble when it came to selling the house.
In the same vein, we looked for a house that was turn-key. Although Mike is pretty handy, we knew he would be up to his eyeballs in school work and would not have time to upgrade or remodel a home.
Seeing the prices and possibilities of the fixer-uppers was definitely tempting, but we resisted. I don’t know how many times through those law school years I said to my Mike, “Aren’t you glad we didn’t get a fixer-upper?”
Don’t get me wrong, for people who are passionate and skilled in the fixer-upper department, getting a home that needs work is definitely a great route to go. For us, though, we knew we wouldn’t have the time or liquid funds to do significant work on our future home.
The 900 square foot house that we ultimately bought, was smaller than we had hoped for, but it was in lovely condition in a safe and friendly neighborhood.
5. We took advantage of the First Time Home Buyer Tax Credit.
Now you might think this is a no-brainer, because who wouldn’t take what was essentially a $7,500 interest-free loan from the government? The only “catch” was that $500 of that amount would need to be paid back each year at tax time.
That was in 2008. Who would have known that in 2009, the $7,500 for first-time home buyers would be for keeps?!
Unlike some folks who used their $7,500 for home improvements, fancy furniture, or a new wardrobe, we put ours to work for us. We invested the money so that it was conveniently available when we needed to pay the remaining amount back upon selling our house.
The good news? Since we took a slight loss on our house when we sold it, we actually ended up being able to keep the remainder of the credit. (We were thrilled to sell our home for about $2K less than we bought it for, as most of our friends who were also trying to sell at the same time were unable to sell at all.)
In fact, it’s that mature CD that we used to pay off our first student loan way back before we were even serious about paying off student loans. The mature CD just happened to be the right amount to pay off one of our loans, so, kind of on a whim, we just did it. Since we hadn’t read the fine print that explained that if we sold our house for a loss we wouldn’t have to pay back the money, we never really considered that money “ours” anyway, so that made it easy to part with.
Times have changed
We have a different market now than we did when we bought our first home in 2008. While I won’t deny that these are all still smart financial moves, they all might not be possible for current first-time home buyers.
In fact, we didn’t follow our own advice when we bought our second house in 2017.
Our situation buying our second house was vastly different than when we were buying our first home, mostly because California is much more expensive than where we were in the Midwest. What we would have needed for a full 20% down for our California house was more than the mortgage on our first house, so we bought our second house without 20% down. We started out with a 30-year mortgage. There was no First-Time Homebuyer credit to speak of.
Though the purchase of our second home wasn’t as ideal as the first, it still turned out fine.
If you’re hoping to buy a home in the near future, don’t give up hope.
Focus on what you can control: your earning, spending, and saving. You may be better off saving longer while you wait for a more favorable market. Look at it as an opportunity (more time to save) instead of a disadvantage.
How about you?
- What smart financial home-buying moves have you made?
- What wisdom do you have for those who want to be first-time home buyers?
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