Buying a house is a huge financial decision.
The simple truth is that there are a lot of ways to mess it up, and if you do, the financial ramifications could stick with you for years.
But my goal is to help you avoid some of the most common pitfalls so instead of destroying your financial future, buying a house actually boosts your future financial stability.
Here are 5 ways to buy a house without destroying your future.
1. Buy a House That is Cheaper Than You Can Afford
Many people start shopping for a house before they even know what they can afford.
That can be a huge mistake because we are all capable of finding beautiful homes that are perfect for us…except that we simply can’t afford them, and that’s a big let down.
So before you start randomly checking out houses in the neighborhoods of your friends or coworkers, you have to start by nailing down exactly how much house you can afford.
It all starts with choosing the right mortgage financing options.
Getting pre-approved for a loan at a specific interest rate is the best way to start figuring out how much house you can truly afford.
Ultimately, you’re not just looking at the total price of the home, you’re looking at what your monthly mortgage payment is going to be.
For example, let’s say that your monthly mortgage payment on a 30-year mortgage for an $800,000 house is going to be $3,750 a month.
And let’s say your monthly mortgage payment on a 30-year mortgage for a $250,000 house is going to be $1,850 a month.
Now it’s much easier to look at your monthly household budget and see which number is more realistic for you.
A good rule of thumb is that your monthly mortgage should be no more than 20% of your monthly take-home pay.
That’s a great start, but if you really want to buy a house that won’t destroy your future, you’ll want to buy a house that is even cheaper than you can afford.
If you can get your monthly mortgage payment in the 15% – 18% of your monthly take-home pay, you’ll be in a fantastic financial position for years to come.
And I know, buying a cheaper home is not the popular move. Your friends won’t be doing it. Your co-workers won’t be doing it. Your family members won’t be doing it.
In fact, they’ll probably think you’re crazy.
But having flexibility in your monthly budget is a big deal, and signing up for a monthly house payment that stretches you to your financial limit is a recipe for disaster.
So if you want to buy a house that will set you up for long-term financial success, look at your monthly budget, and figure out exactly how much you can afford to pay each month.
Then go find a house that is even cheaper than that.
What We Did: We bought a smaller house than many of our friends and coworkers, because we wanted a mortgage payment that we could easily afford on just my income. We knew that my wife would want to be a stay-at-home mom when we started a family, and buying the most expensive house we could afford would have taken that option away from her.
2. Don’t Buy Extra Stuff For Your House For 2 Years
What? But we bought the house knowing we would need to redo the kitchen and install new bathroom sinks and get new furniture for the game room!
If you get a fantastic deal on a fixer-upper, then hopefully you factored in all the costs for all the “fixing up” you’ll be doing after you move in.
But what I find is that most people only think their house is a fixer-upper simply because it isn’t “the perfect house” they want.
So they want to redo the kitchen, but the current kitchen is fine.
They want to install new vanities in the bathrooms, but the current ones are fine.
Sadly many people have been brainwashed by every single show on HGTV to believe that the first step after buying a house is to immediately start spending a ton of money to turn it into our own unique personal oasis.
The truth is, shows on HGTV are sponsored by home improvement companies that want you to think it’s completely normal to spend thousands of dollars “fixing” things that don’t actually need to be fixed.
To break this toxic thinking, I recommend not doing any major projects to your home for 2 full years.
This accomplishes two very specific things.
- As you shop for a home, you have to really decide that you’re ok with it as-is for 2 years. This will help you choose a home that doesn’t have to be perfect, but it has to be perfectly fine to live in the day you buy it.
- After living in your home for 2 years, you will acclimate to many of the things that you absolutely wanted to change the day you moved in, and those urges will subside.
You may have wanted to rip out the carpet when you moved in, but after 2 years, you’ll realize the carpet is just fine the way it is.
You may have wanted to redo all the kitchen cabinets, but after 2 years, you’ll realize the existing cabinets are fine just the way they are.
This will happen with a lot of things, and in that first 2 years, you’ll save a ton of money not redoing a bunch of things that may have felt necessary in the moment, but time will show you that they actually aren’t.
After 2 years, if there’s something you still can’t stand and needs to be changed, you’ll know it, and you’ll be at peace knowing you’re only spending money on things that really need updating, and not just throwing all your money at your never-ending wish list.
What We Did: When we moved in we definitely wanted to replace the carpets and replace the fence in the backyard. We held off on both, and 12 years and 4 kids later, we’re glad we kept the original carpet. As far as the fence, over the years our neighbors on each side of us ended up redoing their fence, and the back fence isn’t great, but we realize it’s just fine, and the kids play back there and don’t care about it one bit.
3. Eliminate All Your Other Debts
When you look at your budget, you’ll likely realize a healthy chunk of your money is getting eaten up by car payments, credit card payments, student loans, and all sorts of other debts.
These items will be an albatross around your neck for years, and you’ve got to eliminate them as quickly as possible.
But since you bought a home you can easily afford, and you’re committed to not doing any big home projects for 2 years, that means you’ve got 2 years to absolutely start killing those other debts.
Once some of your debts start disappearing, you’ll start to have even more breathing room in your monthly budget, and trust me, that’s going to feel really good.
And that means after your 2-year-home-renovation-waiting-period is over, you’ll be in a much better position to avoid debt and save up to pay cash for whatever projects you do decide to take on around the house.
Paying cash and avoiding debt is a huge factor in making sure you’re set up for a healthy financial future.
What We Did: Most of our debts were all paid off before we bought our house. We still had a small student loan that overlapped our mortgage by a few months. But that meant we started building up our emergency fund so we could have cash ready to handle any changes we wanted to make…or repairs. Yeah, we had to completely replace our A/C unit 3 months after moving in. Ouch!
4. Start Making Extra Payments on Your Mortgage
Whether you choose to pay off your mortgage aggressively, or just build in a regular plan to make extra payments over a longer period of time, paying off your mortgage early will save you a TON of money.
How much money you ultimately end up paying for your home largely comes down to how long you end up making monthly payments on it.
The longer you make monthly payments, the more interest you pay on the loan, and the more money you end up paying overall.
So shortening the amount of time you spend paying your mortgage is a huge financial win.
There are a couple of popular ways to make extra payments on your home.
- If you get paid every 2 weeks, there will be some months where you get a 3rd paycheck. Use some or all of that paycheck to pay money directly to the principal on your mortgage.
- Use any extra sales commissions or end-of-year bonuses to pay directly to the principal on your mortgage.
- Split your mortgage into 2 monthly payments, paying half with your first paycheck and half with your second paycheck. By paying half of your mortgage earlier each month, you’ll be reducing the interest paid over the life of the loan.
- Just pay extra every month. As your other debts are eliminated and you create room in your monthly budget, decide to pay extra on your mortgage as part of your regular payment each and every month.
No matter how you choose to do it, paying extra directly toward the principal of your loan balance will dramatically shorten the life of your loan, therefore dramatically reducing the amount of money you’ll pay in interest.
Always check with your mortgage company to find out the best way to make extra payments to make sure those extra payments are paid directly to the principal of your loan balance. Different companies have different ways of processing your payments, and that last thing you want is for them to screw up all your hard work.
What We Did: We started out using method #1 and #2, just paying extra money to our mortgage here and there as we had extra money come in. Eventually, we were able to build in paying extra money every single month, and we ultimately paid off our mortgage in just 7 years.
5. Live In the House As Long As Possible
This one may be difficult depending on many circumstances that are out of your control, but ultimately the longer you live in the home diligently making your mortgage payment, and even making extra payments, the lower your mortgage balance will be and the higher your equity will be when it comes time to move.
Sadly, most people simply buy a house, only to live it for 3 or 4 years before trying to “move up” to a bigger house, better neighborhood, fancier zip code, or whatever the reason may be.
By only living in a home for a few years, unless you made a sizeable down payment, your equity in the home is going to be tiny, and the balance on your loan will still be quite large.
This is not a great way to set yourself up for financial success.
There’s nothing wrong with moving to a bigger home or a nicer neighborhood, but as much as it is in your control, the longer you can stay in your current home building up equity and reducing your loan balance – and avoiding the increased expenses of your next bigger, better home – the better off you’ll be in the long run.
Ultimately, you’ll want to be able to use the significant difference between your remaining loan balance and the sale price of your current home to help you put a sizeable down payment on your next home.
This will greatly reduce your monthly mortgage payment, and allow you to continue paying extra on your new house to continue reducing the total length of your loan.
What We Did: We bought our home knowing it wasn’t our dream home, but that we could live in it for 10 years or so while we started our family. It’s now been 12 years and 4 kids later, and we’re still living in the same home. To our surprise, the home works just fine even if 2 of our girls have to share a bedroom. We don’t have plans or a desire to move, but if we do, the fact that this house is completely paid off will be a big win when it comes to paying for our next house.
Buying a home is a huge financial decision, and doing it the wrong way can have drastic and long-lasting effects on your financial situation.
Sadly, if you follow the crowd or just do what you see on TV, you’ll likely end up making just about every mistake possible. (Those TV shows never show the homeowners 3 years later when they have to sell their dream home because they can’t afford it or are being foreclosed on.)
But if you’re strong enough to swim against the cultural current and able to keep your own impulses in check for a few years, you’ll be able to make a home purchase that will not only help you avoid financial ruin, but will actually help set you up for financial success in ways that many of your peers can only dream of.