Recently, I was speaking with a real estate agent, because I was curious about a very well-developed community in Orange Park, Florida. This community had it all. It had swimming pools, golf courses, tennis courts, swimming slides, an elementary school, and a nature park off of the St. Johns river. She immediately went on her sales pitch about the community and asked if I was ready to buy. I told her that my wife and I were waiting until she was done with school, and we wanted to live in Jacksonville for a year before buying a home.
She then proceeded to tell me about her 19 year old son who bought a $200k house on a 40 year mortgage. It was clear to me that her son was the victim of having a mom who was in the real estate business and brainwashed him into thinking that buying a house is ALWAYS the best thing to do. What’s your opinion? Do you think a single 19 year old should be a homeowner with a 40 year mortgage?
My question is, did he take a look at the amortization schedule for a 40 year mortgage? My guess is that he won’t start paying anything significant on the principle until 15 years into the mortgage. Maybe he’s banking on appreciation in a housing market that is dull and won’t start going up for another couple of years. What other incentive is there to buy just to buy? Does a 19 year old need all of that space? Does he need the hassle of maintaining a home like that? Some of you might be saying, “Are you nuts? Homeownership is a great thing! He’s showing a lot of responsibility for owning a home that young!”. I’m not saying he’s done a horrible thing, but what I am saying is, what’s the point? He can throw away his money to a renter or to interest. Sure, he’ll probably get his money back when he sells, but he’s 19 years old. What if he wants to move quickly and no one will buy the house? What if he can’t afford the payment anymore and he needs to sell?
My point is that homeownership CAN be a burden if you don’t do it right. Here are some tips for buying a home the conservative way:
- Save up a big down payment of at least 20 percent.
- Buy a home on a fixed-rate 15 or 20 year mortgage.
- Don’t allow your payment to exceed 30% of your annual income.
- Save up a large emergency fund to take care of unexpected maintenance problems
The next 18 months will be a great time to buy a house. Prices will continue to fall, and sellers will become more desperate to sell. You’ll be able to get your closing costs paid, a home warranty thrown in, and maybe even some furniture! However, don’t buy into the homeownership fever. Don’t let a salesperson, family member, or friend pressure you into buy a home before you are ready. If you want to buy a house in the next few years, my suggestion is to put together a systematic plan that with the goals listed above. If you follow those, your home buying experience will be extremely enjoyable and less stressful.