Why your first house purchase is the most important one.

 Most of us aspire to own our own homes one day. It’s the American dream. But, as with many things in life, buying a home is probably best done in moderation, especially when it’s your first one.

Foundation:

Before attempting the largest purchase of your life, you’ll want to have your financial house in order. Build up your credit. Pay all of your bills on time. Save up for a decent down-payment and closing costs. These 2 costs could total 25% of the purchase price. Then, get a pre-approval from a bank, which tells you exactly how much house you can afford to buy.

Be like water, my friend:

Bruce Lee said to “be like water,” because “water can flow or it can crash,” and it can adapt to fit any container. You want to be flexible and adaptable, like water. You want your first home to be an affordable one, which gives you the flexibility to pursue other life goals and the ability to adapt to changes in life.

The bank will give you the maximum amount that you qualify for. But, you know better. You want to stay well below that amount.

How did so many home-owners end up hurt during the last housing crash? They bought too much house. They stretched their wallets to the breaking point. And, once it broke, their only recourse was to go into foreclosure or walk away from their home.

There was no flexibility, no ability to adapt to the changing situation at the time. They could not sell their house because they were underwater (owed more than the house was worth). They could not downsize because they had put all of their money into their current house, with none left for emergencies or anything else.

Advantages of being flexible:

So, what does being financially flexible allow you to do? Just to keep numbers simple, let’s say that you and your spouse make $200,000 combined (for example, 2 cops at top pay in my city, with plenty of overtime) and you’re looking to buy your first home. If you have money saved for a down-payment, and your credit is excellent, the bank may loan you enough to buy a $1,000,000 house!

Your monthly housing expenses-including mortgage, real estate taxes, utilities, etc.-will probably be over $5000. That’s a lot of money to spend every month! (Don’t forget to save up for the 20% down-payment of $200,000 also). You will struggle to live paycheck to paycheck unless you get some massive raises during your career.

But, you’re frugal with your money. You know that spending the max allowed by the bank could hurt you financially. You decide to purchase a more modest $500,000 home, using $100,000 as down-payment. Right off the bat, you’ve saved $100,000 in down-payment that could be used elsewhere. Your monthly housing expenses-$2000 in mortgage payments, plus a smaller real estate tax, etc.-total less than $3000. That’s $2000 less in housing expenses every month, which leaves you with a lot of flexibility.

Closing costs, consisting of mortgage taxes and various other fees, are roughly 5% of the purchase price. On a $1,000,000 house, you’re spending $50,000 on closing. On a $500,000 house you’re spending $25,000. That’s another $25,000 you just saved that could be invested for the future. More flexibility.

In addition, the average first time home-buyer moves within 12 years. The average second time buyer, or buyer of a “dream home,” will stay in their home a few years more. Life, work, and family situations all change. You want to be able to adapt to the situation. You want to be able to move, upsize, or downsize as the situation demands. Buying an affordable first home gives you the ability to adapt to all those situations.

(Don’t worry if you haven’t saved $100,000 for down-payment on your first house. There are first time home buyer programs that allow you to put down very little money. But, you should buy even less house with that method since you’re starting off with zero equity in the house.)

Other life goals:

But, buying a cheap house will not get us into the neighborhood we really want! It doesn’t get us our dream house! True. Perhaps, you’ll only buy an apartment in that nice neighborhood. Perhaps, it’s a decent house in a not so great, but still nice neighborhood. But, saving $100,000 on a down-payment, $25,000 in closing costs, plus a monthly savings of over $2000, gives you the flexibility to do all of the following that you more than likely couldn’t do with the $1,000,000 dream house:
-Save for retirement
-Save for kids’ college
-Save for emergencies
-Save for a nice car
-Save for an upgrade to the house
-Go on vacation without borrowing money
-Keep your home if the economy tanks and one of you loses his job
-Keep your home when the housing market crashes again and your home goes underwater
-Pay off your home that much faster
-Not have to work harder just to pay the mortgage
-Pursue higher education for greater pay
-Pursue career opportunities that actually interest you
-Retire early
-Save for that dream house! (and maybe turn your first house into a rental)
-Invest in the stock market or rental properties, which generate more income, which allows you to do more of everything on this list, and at a faster rate
-Need I go on?!

Conclusion:

Buying an affordable first home just makes sense financially. Your situation and your numbers will differ. But, if you run your income versus expenses, you’ll likely reach a similar conclusion: buying an affordable first home will give you the ability to adapt to changing situations, and the flexibility to pursue other life goals. Your first home purchase is the most important one. Be like water, my friend. Be flexible and adaptable.

You are a fast learning grasshopper. You will go far in life. Your lucky numbers are…Jk. You know you’re taking advice from a stale cookie, right?