How can you ensure you’re best-positioned financially before buying your next home? Buying three homes helped me become a debt-free millionaire in my thirties. Here’s what you can do.
Don’t Buy At The Top Of Your Budget
Start your purchasing budget on half of what the bank approves. My husband and I stuck to this rule for the last three homes we bought because our goal is to become financially independent in our forties.
When we bought our first home together, we were prequalified for at least a $200,000 purchase price on his salary and $400,000 using both our salaries.
Instead of going to the top of that price range for a much bigger home, we bought a home for half of what we were approved for. This allowed us to have margin to pay off student loans, save for retirement and pay off the home early.
We also had peace of mind knowing that if one of us lost their income, we would still be able to make our house payments without too much strain.
Save Up A 20% Down Payment Even If It Delays Your Timeline
Financial advisors, mortgage brokers and real estate agents will all assure you that you can put as little as 3.5% down on a 30-year mortgage.
According to the National Association of Realtors, the median U.S. existing home sales price was $363,000 in February. That would require a down payment of $72,600.
Yes, putting down 20% is not easy, especially for home buyers juggling student loan debt, credit cards, family and retirement savings. But if all you can afford is the minimum down payment, you’re likely not in the best financial position to buy a home — yet.
Committing to a goal of 20% down on a home required me to live well within my means, control spending and inspired me to grow my income over the years. It helped to build financial discipline and taught me how to choose long-term stability over short-term comfort.
When you make a low down payment on a home, or when you finance it over 30 years, the bulk of your monthly payments will be to cover interest and private mortgage insurance, anyway.
Don’t Fall Into The 30-Year Mortgage Interest Trap
I’ve successfully paid off three homes since 2013 and the biggest reason was because I opted to finance them on 10- or 15-year mortgages rather than 30-year options. The lower interest rates and the shorter repayment periods have saved me hundreds of thousands of dollars in interest, and allowed me to pay off the homes even faster than the mortgage durations.
Here’s an example. Let’s take that same current $363,000 median home price. If you were to buy that home today on a 20% down payment, you’d have to finance $290,400. On a 30-year mortgage, the monthly payment would be $2,196, but the total interest paid would be $460,379 over the 30 years.
Take that same down payment on a 15-year mortgage. With the same interest rate, the total interest paid would be $203,904 with a monthly payment of $2,966. That difference of $770 per month is certainly a challenge, but it would save $256,475 and 15 years of payments. That could be enough money to buy another home!
Buy Only If You’re Staying For At Least Five Years
As we potentially head into another economic downturn, consider how long you plan to live in your next home.
My husband bought his first home in 2009 and unexpectedly moved two years later, which resulted in having to pay $10,000 to sell the home.
If you’re financing your purchase with a mortgage, and not reasonably certain you’ll stay for the next five years, you risk losing money if you need to sell your home or if its value decreases because you’ve not built much equity.
It’s Okay If Homeownership Is Not For You
Homeownership has often been the symbol of the American dream. But you can end up feeling house poor, even with a beautiful home, if you can’t afford to do much else.
As the children of immigrants, and as millennials, my husband and I felt the constant pressure from our families and friends to “settle down.” Our parents were eager to show their friends that they had raised responsible adults, and we wanted to show our friends how “successful” we are.
We ended up buying a 2,200-square-foot, 4-bedroom home and lived there for eight years. We were constantly fixing it up, mowing the lawn we barely used, and filling the rooms up with furniture and décor.
It turns out we didn’t actually enjoy homeownership, and to everyone’s surprise, we sold our paid-off home in 2022 and went back to renting. Now we spend our time, money and energy toward building a business, traveling globally and practicing early retirement.
Before you rush into real estate, consider if homeownership is really for you: Would you rather live life on your own terms, rather than on your loan terms.
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