Buying A House: The American Dream

Becoming homeowners is part of the American dream. It seems more and more unobtainable today, but diligence is all that is required to own a house.

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My Feelings Of Owning A House

Many people among my family and friends have, or are buying a house. Me, I live in a rental apartment like 36% of Americans. Do I feel inadequate for living in a rental apartment sometimes. Yes, briefly. But then I remember how people can be homeowners for as little as 3.5% down. With the average down payment being 6.4% people are not really buying a house for much more than that. Come to think of it, it seems like almost anyone can own a house. Hey, most people do.

How many people are fiscally responsible? According to MarketWatch 23% of Americans over 55 have only $300,000 or more saved for retirement. So not many. NBC says for retirement, at a minimum, you must have twenty times your expenses, and even a million may not last enough for some retirees. So imagine how inadequate $300,000 is, unless you plan to retire very conservatively.

How many homeowners can say they feel like they will retire? That is without selling their house and going homeless or living off their children? The latter is a serious proposal some baby boomers make to retire. I have heard a man twice my age who is in the medical field say that he hopes his daughter does well so he can retire in case he does not sell his medical firm for enough to cover his retirement. I don’t think it would be the best idea to rely on the millennial generation for retirement (they’re the ones people say are irresponsible).

It is a far better achievement to lay out the path for financial independence than to have a piece of paper which says, paraphrasing from one of my favorite comedians: “the bank owns this property, and they allow me to keep my shirts here while I pay it off.”


Ready To Become Homeowners?

People I meet tend to have the extreme views on buying a house and rarely a middle ground. One extreme says that you should just buy a house and just pay the minimum.

That’s fiscally sound (Extreme sarcasm notice).

The other extreme states that you can be homeowners if the following are true:

  1. If you have plenty set for retirement.
  2. Your savings and investments are in order.
  3. You find a place you can see yourself living at for a long time (>10 years).
  4. You have enough to pay for a down payment of over 25%.

Easy right? (Extreme sarcasm notice).

I do lean more towards the latter, you do need a decent amount for retirement, savings before buying a house. Amending the list you should see yourself living at that place for a minimum of 5 years, not necessarily 10, and you should try everything you can to reach a 20% minimum down payment, 25% is unnecessarily high. To see how to invest for retirement, check my previous post.

I’d say once you have all of these decently set, you should be able to become a homeowner.

Having Enough For Savings

This should be straight-forward. You should want to have enough aside to pay for bills just in case you face some financial hardship. Which happens to ALMOST EVERYONE.

How To Pay For A House

Simply put, not like most people. With the average down payment of 6.4%, it’s no wonder most people feel under the water when it comes to their mortgage. Also, almost a third of my generation has used their retirement funds to become homeowners. We should feel ashamed. Not just my generation, but everyone. To every millennial, are you really going to let people push you to a brink that would force financial hardships on yourself? To everyone who makes anyone feel this inadequacy, take care of your own financial future instead of trying to take care of other’s.

Instead of pulling money from a good investment you will need. Save your money. You can set up a low risk fund which should still beat the inflation rate, but even a basic savings account can do. Just make sure it is liquid. For example, a long-term certificate (greater than 1 year) or a bond is not a good idea of a liquid account. Just save/invest regularly like any other thing you save and invest for.


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How Much Should You Have To Pay For A House?

Your other investments, retirement fund, and emergency savings should not be considered for your down payment. You should pay at least 20% of the house and have at least 2% extra for repairs. The Balance states that you should have 1% of the house saved each year for repairs. Remember, in a previous post I have mentioned that a house is a liability. If you read some of the books I recommended, you will see I am not the only one who feels that way.

Oh, did I mention that you have to pay property tax, sewage, garbage, insurance, brokers fee, etc. New homeowners probably forgot these costs exist because the landlords usually cover them. The point is, the payment for your house will go well beyond your mortgage. I have heard that the fees can add an additional 30% to your mortgage. In other words, if you rent an apartment for $1,300/month, the mortgage of your house should not exceed $1,000/month if you expect to pay a similar monthly cost.

Why A 20% Down Payment?

  1. Lower Interest

It’s simple math really. When you take out a loan, the larger the down payment, the less you will have to take out in a loan. Since the loan is smaller, the monthly payments are smaller. The interest (or the money the lenders will suck from you) will be lower.

2. Higher Equity

A house is not exactly an investment. However, the equity of the house is better by making a 20% down payment.

3. No Private Mortgage Insurance

Otherwise known as PMI. PMI is money paid to a lender in case of a default. These could be 0.5 to 1% annually of the loan. In other words, a $100,000 house loan which requires PMI would require $500 to $1,000 annually on top of your mortgage. This is one of the best ways you can waste your money. I highly doubt you want to do that. If you need more reasons, Investopedia states that the PMI could be applied beyond the 20% threshold. Technically there is nothing that can keep lenders from applying this for the rest of your mortgage. A PMI can never be applied to a housing loan with at least 20% down.

Is It Ok To Pay Less Than A 20% Down Payment?

I know some homeowners say that they would never have bought a house if they had to spend years saving for a 20% down payment. I can understand that. My older brother had to pay less than 20% but that was for a house in DC. Rent there is atrocious, and a condo would be just as expensive, if not more, for less quality and control. The only time I will say that it is ok is if the alternatives are worse. But you must have a very solid plan to keep your finances in order.

Final Thoughts

Home ownership is not correlated to financial success. I have heard of the phrase “house rich and cash poor,” which could be applied to many homeowners’ situations. However, there are many benefits to house ownership. Assess the pros and cons of owning vs renting before you buy.

I do not own a house yet because I am still a student and the consensus is buying is only cheaper than renting if you stay more than 5 years. I am definitely not an expert on buying a house. That’s fine, there are many people who know more about it than me. Find some experts, ask some homeowners what they had to do for buying a home. In addtion, there are many books to read to find what to look for in a house as listed below.

I can only say that you yourself will know when to buy a home. Do not let anyone else tell you when you should own your house. Owning a house is a great adventure, and can help you forge your wealth.

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