Buying a House
While reading around the Internet this morning, I stumbled on a blogpost that offers 7 simple steps to grow your fortune. All of the steps on that list are good ideas. My wife and I already do most of them. While reading through the comments on the post, however, I found this statement:
One of the best pieces of advice I give my friends and family isn’t on your list - and that’s to buy a house.
An apartment is a money pit - you spend anywhere from $500-$1000/month for a place to live. What many people in their 20s don’t realize is that they may already be paying just as much as a house mortgage - or more.
The benefits are huge - you have your own place, you improve your credit, and you build equity. While you can’t cash out the equity in your house as easily as you would a savings account, many homes continue to appreciate in value - making you even more money.
Five or ten years from now when you move on to another home, you sell your house and all those months of paying mortgage aren’t lost - you use those as a down payment on an even better home.
It’s good advice and it’s advice that I’ve heard more than once. Unfortunately, it’s a little unrealistic for us for several reasons. To begin, let’s take a quick review of our finances:
We currently have a little over $76,000 in student loan debt.
Our student loan payments consume a little under 16% of my net income.
Our current rent payments consume a little over 24% of my net income.
In our current apartment, we are only responsible for our electric bill. That’s another 2% of my net income.
As you can see, 26% of my net income is tied up in housing expenses and 16% is tied up in debt. (I should mention that student loan debt is the only debt we currently have. Our car is paid off and we’ve paid off the other short term debt we had.) A grand total of 42% of my net income is currently tied up in either housing or long-term debt.
Now, let’s review the housing market in southern Wisconsin:
The average 3-bedroom house in our area sells for $190,000 to $240,000.
Property taxes for a house this size would be somewhere around $300 a month.
The best case scenario for a monthly mortgage payment involves buying a $190,000 house with a $40,000 down payment. Assuming that’s the case, our monthly mortgage payments (on a 30-year mortgage) would be around $800 a month. If, for any reason, the down payment were smaller or the home were more expensive our mortgage payments could be as expensive as $1,200 a month.
Even in the best case scenario, we would need to spend at least 38% of my net income on housing. The actual amount would be even higher considering that we would need to pay for our own heat, water, trash removal, other utilities, and property taxes if we owned our own home.
As attractive as owning our own home would be, it would cost us almost twice as much as renting would. We’ve concentrated on cutting the fat out of our budget for the last 2 months. And while we do have a small budget surplus for incidental expenses, it’s simply not large enough to allow us to increase our required monthly expenses 12% or more. Until we’ve saved enough money for a large down-payment, home ownership simply isn’t affordable in Dane County.