Reduce Debt Increase Wealth

Saving for a House

October 31, 2021 MIsterchuck Season 2 Episode 85
Reduce Debt Increase Wealth
Saving for a House
Show Notes Transcript

What to buy that first home or move up into another home? The first thing you need to do is save up a down payment. But that still not enough, so MisterChuck expands on things to do to get into that home.

 Article Links:

 https://www.rocketmortgage.com/learn/how-to-save-for-a-house By PATRICK CHISM

 https://time.com/nextadvisor/banking/savings/how-to-save-for-a-house/ By Kendall Little,Raina He

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination, saving for a house, want to buy that first home or move up into another home, the first thing you need to do is save up a downpayment. But that's still not enough. So I'm going to expand on things to do to get into your home. I have two articles in my show notes that I'm gonna refer to later on. But I'm gonna start out by just talking of what I did. I was a one income person, I graduated from college, didn't have anything. Well, I had a car that my brother loaned me, I had some clothes that I had when I was in college. And that's about it. I didn't have any furniture, I had nothing. So start now I live with other fraternity brothers and we rented a home nearby and we moved in, I had to set you know, get a bed, and dresser and things like that, which I scrounged around and got fairly cheap. And I was driving my brother's automobile that you know, kept breaking down, it was all our car had problems. But it got me back and forth to work. And after a year of doing that I moved in with another from like living with three other people to live in with one person. And I did that for a year. He was hardly ever there because he was spending his time and his girlfriend. And eventually he didn't want to run an apartment because he didn't need to. So you know, I was left alone. So instead of staying in that two bedroom apartment, I you know, got a little lease. And I moved in I found a one bedroom apartment. And at this time is when I started to realize I'm going to be living in the city, probably my working career. I was planning on moving back to my hometown, but that never happened. I had a decent job working for the state. The tax department was an accounting major. And I thought, well, I've got a decent job. I'm not making a whole lot of money, but it's going to get better. But I also knew I wanted to buy a home because paying rent for the next 30 or 40 years, I knew I was just wasting my money. Now, with that said, that was my thoughts. Back in the 80s. If you live in an area that has high housing costs, it may be better for you to rent than the purchase. That's gonna be up to you to decide. Like California, LA, New York City, places like that, where it's really super expensive to buy your own place, it may be better to rent. Or if you're working in a career where you get transferred around a lot. You know, there may be three to five years, it may be better to rent, just a note there. So once I decided that I wanted to buy a home, I started looking around at the prices of homes. And I figured out a way I can afford any of this in my head for a little money for down payment. So my first step was to start saving up money for a down payment. But I had a car payment because my brother wanted his old car back. So I had to go out and buy a new car so I had a car payment. I had some credit card debt and wasn't too bad at this point. I knew there was no way that I was going to get a mortgage on a home if I had too much debt. So what I did, I sold that newer car off. I had cash in the bank and I went out and I bought a good used car. It was a 1977 Ford Granada straight six owner was a three speed on the floor standard transmission. That gentleman was having a hard time to sell it selling it because it Was had a standard transmission. And even back in the 80s, nobody knew how to drive. And I did. So I bought it got a good car, I had that car for quite a long time it served me well, for the money, I paid for it, no complaints there. The other thing, once I got rid of my car payment, I paid off all my other credit cards, I tried to keep my debt as low as possible. And I started saving my money. And I was only in that apartment for about one year. And I then after a year, I was getting close to having to renew my contract for the rent. And I didn't want to stay there a second year. So I got ahold of a realtor and told him what I was kind of looking for, you know, like a two, three bedroom home, at least three bedroom because I thought the resale part would be better. One bath, nothing too exciting. And I've looked around before I even dealt with her. And she recommends some areas of town and I wasn't too thrilled on one side of town because it was you know, a lot of people lived out there and I saw and as a area that was gonna start going down in value. And I wanted to be somewhere that was gonna be up and coming in the next 10 years. And I wanted to be somewhere that had a decent School District, because I was thinking about the resale value. And she directed me to an area of town and found a 960 square foot home that was able to afford, I had enough money for the down payment. And I got in that first home. I lived there for five years. And it more than doubled in price and five years. And I was able to sell that home and get in the current home. They've been here now for like 30 years. And I had a lot of money for the downpayment. And I was pretty well off. Even though I was stretching my budget to make the move and only lasted a short period of time before it was comfortable to make a payment that house payment. And I wasn't stretching my buzz budget any longer. That's my story. And what I'm trying to relay here is, if you're looking for your first home, don't buy your dream home, the first house, you're never going to be able to afford it. You need to find a home in a decent area with a decent school district that's got nice people who maintain their house. And you can tell by Driving through the neighborhood. If they're not lowering their yards. If there's trash laying around, then you might want to look somewhere else because that neighborhood and may not be a great place to try to resell. So buy a house, you can afford to buy a house that's not going to stretch your budget live there. anywhere from five to 10 years, it's going to go up in value, you'll be able to sell the house for way more than you owe on it. As I said, owe on it not what you bought it for because you could owe more than what you bought it for if you borrowed money to make improvements. Just a note. So if you can get sell it for more than you owe on it, pay all the closing costs and still have a big chunk of money, have a bigger down payment on your next house, which could be the home you're gonna stay in for 15 to 20 years, you're gonna be better off and you'll be used to making those house payments. So what's the first thing you need to do? Other than trying to get your debt under control. You got to make timely payments on everything you're paying for utility, your rent, all your credit cards, all your loans. If you don't do that, you're gonna have a poor credit score, and it's going to be really difficult to get that mortgage and I'm going to refer it to my first article which is from the Rocket Mortgage calm 11 ways to save for a house tips and tricks to fund your downpayment. First to determine how much you need for downpayment. Some potential homebuyers believe you'll now never be able to buy a home because they cannot afford a 20% down payment. The truth is that many lenders no longer required 20% down. So how much you need for a down payment 3% or less. Depending on your credit score, there are this already, depending on your credit score is going to dictate how much of a downpayment you need a conventional loan could be as little as 3%. Or if you qualify for USDA or VA loan, you might be able to get a mortgage with no downpayment. Here's the 20% myth. So I always recommend 20% because it's gonna make your mortgage payments smaller. And it's gonna keep you from having to pay the private mortgage insurance. So why do people believe they need 20% down to buy a home? The 20% down myth comes from private mortgage insurance PMI rule that most lender and mortgage investors have. If you have less than 20% down the closing, you need to pay for private mortgage insurance that protects the lender and mortgage investor if you default on your loan. So having a 20% down payment will save you money over time, it's not a requirement to buy a home. And here's a note, once you been there a while, say five years, and you have equity built up in the home. And if you got if you owe more equity meaning the market value of their home five years down the road is significantly higher than what you bought the home for. Plus, you made payments on your mortgage so it's decreasing. If that fair market value, the difference between the fair market value and what you owe on your mortgage is greater than 20%, you can apply to have the private mortgage insurance removed. Just a note. Home affordability. If you're just beginning a home buying journey, a great place to start out is figure out how much you can afford. You can do that at the very beginning. So you know where the areas of town the houses are selling and your price range. And you can do that by finding that calculator online and put in your you know, monthly income or whatever and asked for L calculate how much you be able to afford. Remember, that's only going to tell you how much afford for a loan, which is principal and interest. You also got to factor in your homeowners insurance and real estate taxes. That number needs to be less than 43% cannot finance a home nobody's gonna lend you the money. If your mortgage payment is greater than 43% of your monthly income. Nobody's going to lend you the money. The first step in the savings process is budgeting. I know that always comes up. If you don't know where your money goes every month it's impossible to divert money to your down payment. How you gonna say money if you don't know what you're spending and what's coming in. Consider downsizing, the fastest way to save money towards a down payment is downsizing. And that's basically what I did I got rid of that car payment and I bought a good used car. So that was one monthly payment I got rid of and I was able to save a little bit more. downsizing is the process of reducing your expenses and living below your means while you save. When you downsize, you reduce the amount you pay for necessity expenses and and instead divert the extra money into a savings account. Moving into a smaller apartment, selling one of your family's extra vehicles or moving to a more affordable area are ways to downsize. Many people downsize while they save for major purchases, you may have fine, you enjoy the simple life, I know I do. Reduce or cut out bad habits. Again, once you have a budget, and you know where your money's going, you can identify the things one you're never not using any longer and that you're still paying for when to where you maybe you're spending too much money. And you can cut back in those areas. Now, one of the ways to downsize if you're single, is to have roommates, and to split the cost of living. Even after I was in my first home, I had a roommate, which I charged him like $200 a month for rent. And then, you know, half the utilities figure and he was using half the utilities. He was there, I could turn utilities way down and save money. If he wasn't there. Cut out bad habits, which we talked about that in past episodes, pass for a race, they have little a little money leftover it might be a good time to ask for raise the economy right now is everybody's looking for employees. If you threaten to leave, maybe it'll pay you more. I don't guarantee it, but it's a possibility. See what other employment options are out there. Maybe you've have more experienced than you had, when you got that job you're working at. Maybe there's somebody else looking for something similar that they're looking for somebody was more experienced, maybe you can provide them with that. Another great way to say money is skip a vacation or do a vacation where you don't spend a lot of money. Instead of going on a cruise or taking a trip where you fly in somewhere and stay in hotel rooms. Try to stay home and do short little trips where you can drive. Pick up a side hustle, chop down your debt, ran out of spare room or parking space, ask for help automate your savings. You know you got online banking nowadays, you can go in and automatically transfer money from your checking into your savings. Again, you would need to have a budget to know how much money you can do. The second article is from time, comm or net advisor, banking savings, how to save for a down payment for a house. And it's pretty much the same thing. But another thing to consider is knowing your market. Right now for the last five or six years, mortgage interest rates have been dropping. So everybody is rushing out the more and more people are deciding they can afford a home because the mortgage rate is so low, and make makes them want to buy a home because it's more affordable. And again, if you're buying your own home, I always thought it as rent that someday I'm gonna get back. It's a real investment in real estate, if you take care of the home, keep the properly maintained, it's gone to pay you back. But if you're in a market, we got low interest rates, if you have a lot of people moving into the area for whatever reason, and there's a lot of new employers popping up and there's a lot more jobs available, more people are going to be there. So it's it's a simple economics, supply versus demand. The demand may be very high in the supply could be very low, and that's gonna drive the prices up. If you can wait until maybe the interest rates go up 2% or 3%. So instead of being 3% for a mortgage, maybe you pay four and a half to 5%. The demand is gonna drop off when the demand drops off supplies gonna go up may not be a lot. The main be enough for the prices to drop is my point. So be aware of what's going on and I realtor probably can help you with that. Determine your timeline and think long term. And the main thing is, don't rush the process, it's better to rent for a bit longer and enter their home buying process was a strong saving safety net, than rushed into buying a home that could become a financial headache later on. And this article also says a budget. But you don't want to over buy, especially that first home. If you buy that first home, where you really stretch your budget out to the maximum, and you know that it's gonna be a struggle, or if even think it's gonna be a struggle. So let's give you an example. you're renting an apartment and you're paying $900 a month, you know, you're fairly doing well, you don't have any trouble paying for anything. You can do what you want. But if you go out and buy a home, that's 18 $100, that's twice the payment. And you're going to have additional expenses, you're going to have real estate taxes, and you're gonna have home insurance, maybe real estate taxes you're not paying when you're renting. And you may have some maintenance, maybe the household needs some upgrades, maybe he wants to put new carpet in or new drapes or something. And you're going to really be stretching out your budget, and that's going to put Stress Stress on you, unless you have enough savings, to get that payment down to 12 $100. Something that's going to make it more affordable for you. Maybe you're in the field where it's just, maybe you're expecting a big pay raise, but don't spend your money before you have it. If you can wait a little bit longer, and increase your down payment to get that payment down a little bit, even a few $100 a month could make the difference between being there long term, or having to default on the loan, or worse than that filing bankruptcy or something you don't want to do. And again, this article is saying if you have debt, I would say you should pay it all off, maybe you need to get into the home a little bit faster. Maybe you already found a home, maybe if you got financing somewhat under control, maybe you got an improved. But you're going to be stretching that budget out a little bit, or a lot a bit. So how are you going to deal with it? Well, I would say if you pay off your debt first and save a bigger downpayment, you're gonna be better off and you're going to be more comfortable. But you got to make sure your credit score is as best rated as possible, you have to make minimum, you got to make the payments on time for everything, you have to make the least a minimum payment on all your debt, you cannot have any late payments gonna harm you. If you have late payments, you got a wait a little bit longer. Maybe it was a year ago. So maybe if you wait another nine months, it be less impact on your credit score. If you miss too many payments, you need to start making payments. And you need to look at your debt and try to pay down the high interest rate debt as much as possible before getting in your home. Now all this still applies. If you already in a home and you're looking to for that dream home, that home, you're gonna buy a big step up. You still need to do all this stuff. Need to make your debt to income ratio look good, at least until you get that mortgage. Try to minimize all other debt because you want to make the lender happy. That's the only thing the only reason you want to do it is to make the lender happy. And if you can improve your credit score, you're gonna get a better rate on interest. Now there's some other cost of buying a home, other than saving for the downpayment. Maybe you saved a 20% but maybe you shouldn't put the 20% down Maybe you need to scale that back, put 15% down and have the money to play some of those closing costs, so you don't have to finance them. And that will help you get your mortgage monthly payment down. You got points that you got to pay, there's there's, there's closing costs that the borrower has to pay, and those closing costs, the seller has to pay as the buyer, if it's a tough market, it's a buyers market, meaning there's a lot of homes for sale, and nobody's buying them, then you can negotiate with the seller to pay some of your closing costs. So then that will allow you to get your downpayment a little bit bigger. And don't forget about the cost of moving. Once you buy the house, you got to move into it. So you got to move from where you are to where the house is. And that's gonna cost you some money. So maybe you need to have some money set aside for that also. And then you got the initial, maybe you want to paint right away, which is not expensive, but it might be a few $100. Some things you want to fix up could be, you know, maybe 1000 bucks, so have some money available for that. Also, it's a never ending process. The farther ahead you plan, the more things you think about, the better off you're gonna be. So the bigger downpayment you have saved up, it's gonna definitely save your money in the long term. I'll be back in one moment with my final thoughts. If you listen to this podcast, reduce that increased wealth on an Apple device. Scroll through all the episodes towards the bottom, and you can select write a review, and leave your comments. And you can rate this podcast. I appreciate all feedback. And I thank you for your time in doing so. If you really want to buy that house and turn it into your home, you got to plan ahead, you got to cut back on everything you're spending money on. And you got to finance things in the proper order. You got a finance the house first. Then after a couple years, he can finance the car that you want, or the furniture that you need to put in the house. buying your home is gonna be the largest most expensive purchase you make, at least for the next 30 years when the price of cars are much as a house. But you'll figure that out over time. But the proper order of financing things important. You should be financing your house first, transportation second, and then whatever after that third or fourth. Most people do it in the wrong order. That's why they have problems on purchasing their first time or even upgrading and to their dream home. He can do it. This takes planning and foresight.