Updated. Originally published October 5, 2016
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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It’s been a lot of work, and it’s been really slow, but it worked well. At the same time, I’m glad it’s finally over! But, moving to a home that was so flexible has been extremely positive. We’ve been able to make the necessary changes. And we’ve made changes! The only room that is structurally the same as the one we went into is the laundry room. In addition to tearing down the aforementioned building and walls, we also raised the ceiling, laid down a floor (the upper floor was like a mezzanine in places, so we lowered the floor to completely close the upper floor). Placed), moved the door. . . . It gave us more flexibility than any other home we could afford.
Thanks for breaking down the 15 year vs 30 year! I saw that recently on Instagram or Facebook but they didn’t explain why. And I keep hearing this 20% down… and that makes me nervous because in MD the houses I can afford aren’t in the best shape or neighborhoods I care to live in with my 20% I currently have.
I don’t know where you live.. houses seem to be cheap! Where I live you have a really small townhouse for 225k. So a 20% down payment would be around 40k, wich is hard to get!! I live in Canada.
We are so far off from buying but it’s my main goal after paying off debt. I’m so sick of renting. A 900 square foot home with 4 kids sounds like a challenge! How did y’all make that work? I actually would love to have a small home but I can’t quite convince my husband of that. He still can’t give up his big home dreams. Maybe by the time we pay off all this debt he will change his mind. 🙂
When we lived in our 900 sq ft house, we only had 3 kids. 🙂 And they were ages 4 and under when we moved. The 4th was born when we were living here in the basement. Right now in the basement, I’m guessing we have something like 1200 sq ft or so. We’d like something bigger, but may start looking smaller than we would like just to keep the cost more reasonable. We’ll see!
We used a small inheritance to pay cash for our home. We shopped around a lot to find a house we could afford with the money we had on-hand; and we’ve gradually been making improvements to it as time and cash flow allows. Owning our house outright has been a tremendous blessing in our marriage.
When we moved in, the house was definitely liveable; but it was very quirky. None of the bedrooms had doors or interior walls. Three of the bedrooms were on the second storey but open to the first storey. There were a couple of rooms that were kind of useless, wasted space. Through the years we’ve built walls, knocked walls down, installed doors, added a bathroom, changed light fittings, etc. etc., and while we aren’t quite there yet (still have to tackle the kitchen . . .) we have created a space that fits our family. Sometimes I wish we would’ve bought a house that didn’t require as much work; but as it turns out, having that flexibility to transform the house as our needs change has been a great advantage. As we make changes we have been careful to keep the costs low, and to make neutral choices in the fittings in order to capitalise on resale value. We show our personality through artwork, decor, and furnishings; but if it’s fitted into the house we try to keep it as neutral as possible. And this house has been a very good investment. Today it’s worth about four times more than what we paid for it.
Wow! What a great use of your inheritance money! That’s awesome that your home has quadrupled in value! That’s nice that you could make it into something that fit your needs, even though I’m sure it has been lots of work.
It has been a lot of work; and it’s been really slow-going; but it’s worked out well. At the same time I’ll be glad when it’s finally over! But, moving into a house that had this much flexibility has been overwhelmingly positive. We have been able to make changes as needed. And we have made changes! The only room that is structurally the same as when we moved in is the laundry room. In addition to the aforementioned building and knocking down of walls, we’ve also raised the roof, put down a floor (upstairs was like a mezzanine in places, so we’ve put down a floor to fully enclose the upstairs), moved doorways . . . This has has given us so much more flexibility than any other house we could’ve bought.
That is really amazing! You and your husband must be pretty handy! We have a hard time getting projects done, so I don’t think we’re good candidates for something that needs lots of work, or at least we will have to factor in the cost of hiring it out. 🙂
These are great tips!! (And thank you for the sweet line and link about my fixer upper project! 🙂
One note about PMI – if you are planning on fixing up a house, you can always get PMI dropped as soon as you complete the work and your house appraises at the right value. (But be careful! Make sure you know your numbers before doing this!)
NOT having PMI was a huge priority for my husband and I when we bought the fixer upper. Although, we also did not want to take out a penny more (like a home equity loan) to pay for the renovations. After looking at our own financial situation vs. the major kitchen remodel that we knew was going to add instant value to our home, we choose to cash flow all the home improvements and contact our bank for a PMI drop. It cost $105.00 for a mortgage appraisal and the PMI was dropped immediately. In the end, we only ended up paying PMI for 2 months and now we have a lot of equity in our home, no additional lines of credit AND a conventional mortgage with a competitive rate. 🙂
Oooo that’s interesting Jane! I would love to hear how the numbers work out for something like that. Did you plan the expected increase in value into the amount of your down payment? Have you written about it on your blog? I would be interested in seeing how the numbers work out, as that’s not an avenue we’ve looked into and I have no idea how all the numbers would work together in all practicality. I’m really intrigued though!
PS- Your kitchen remodel is amazing! I love how bright and open it is now. a night and day difference for sure!
Thank you!!! And I haven’t written about how we handled the financial breakdown of the fixer upper purchase, but I need too! Everyone keeps asking about how we were able to swing it. Stay tuned, I’ll let you know when I post about it. 🙂
This is really great advice! My fiance and I are going to be looking into purchasing our first home hopefully in the next few years!
These are all great tips. I would add three things:
1. Have a thorough house inspection and use the results to negotiate down the price.
2. Include anything you want in your written bid. For example, we asked for the lawn mower to be included in the house sale. Since we were first time buyers, we didn’t own a lawn mower. You can ask for furniture, appliances, etc to be included.
3. Never buy the nicest house in the neighborhood.
Thanks Libby! Those are some great home-buying tips! I am definitely all about the inspection. I want to know up front what I am getting into. It’s definitely worth it to get an inspection on a huge purchase like a home! 🙂
I don’t think if I’ve seen you address it anywhere, so I’m curious if you’re committed to staying in California for the long term given the high housing and other costs and if so why (I think your family is from elsewhere?). I know your husband would have to take another bar exam in addition to finding a job but he’s obviously a smart guy that could handle both of those hurdles if desired.
That’s a great question Kathryn! Seeing the housing prices and living costs in other places is kind of tempting, but I know in reality we won’t do it (at least not now) for several reasons.
For me the main reason is that I feel like we should be here for my inlaws. They have been so gracious and supportive over the past four years that we have lived with them. I want to be close and supportive for them as they age. My MIL has been in remission from cancer for over ten years, but the cancer will eventually come back and I want to be here for her.
Another reason (one of the reasons we came out here in the first place) is because my husband had always wanted to have his own business and since he grew up here, this is where all of his contacts are. If we moved, he would have to start over with all the networking and client referrals, etc. Passing the bar exam and getting another job wouldn’t be hard. In fact, we have a family member who is an attorney in another state that has invited him to work with him, but the time just isn’t right for us.