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Our Rules For Buying A House

by The Happy Rock on November 6, 2008

The Rock Garden has been planning a move back to Pennsylvania for a long time now and the wheels are finally in motion.  The logistics of trying to sell our house, buy a new house, and deal with changing both our jobs is a bit scary at times, but it is something we both want(especially me).

We have been talking about this move for years, so we have laid out some common sense principles that will help keep us on track when the house buying frenzy begins to cloud our thinking.  It is easy to get caught up in the moment or make a rash decision that can be a huge financial set back.   We have all seen the effects of making mistakes with mortgage in the news in recent months, it’s not pretty.  The whole point is that  a house to be a blessing rather than a curse.  It should strengthen your family and marriage not put more stress on it.  That is why we came up with this list.

Limit our mortgage to 25% of our take home pay. I know that sounds a little conservative, but living within those means frees your money and energy to focus on more important things and makes the house a blessing.  If you go too much over that you really are starting to ask for trouble.   Don’t let your mortgage guy tell you how much you can afford, only you know your situation.  They also usually base pre-approval numbers on gross pay which makes it seem like you can afford more house that you really can.

I know people will say that if they followed this rule they will never own a house, but I say it just means you need to be more creative or raise your income.   A house isn’t worth a broken marriage, bankruptcy, health problems, stress, or a host of possible bad outcomes when you leverage yourself too much.

I have been toying around with making the guideline 33% of your take home on a mortgage and taxes, which gives you a little more freedom to find a spot with lower taxes and while taking on a little more mortgage.  In New Jersey property taxes are often 20-35% of the mortgage cost on average.  I pay a ridiculous $3,300 in taxes for a 900sqft condo and I don’t even own the exterior of the home or any land.  In essence a 200k mortgage and $6,000 in taxes is roughly equivalent to a $225,000 mortgage and $3,000 in taxes. as far a monthly payment goes.

Put 20% down. This gets you the best rate possible and avoids the extra monthly cost of the Private Mortgage Insurance ripoff.  Unfortunately, we probably won’t have 20% in cash unless we don’t move until late Spring, so part of the 20% will be from our equity in our current home.  This makes timing the two transaction much more tricky, but we will have to live with it.

Purchase a conventional 15 to 30 year fixed mortgage. If you need an ARM or some dubious mortgage product like interest only or balloon mortgage, it should be a clear signal that your are in over your head.  Interest rates are still very low historically, so lock in and let it be.

Buy in a good school district and diverse area. This includes using the Great Schools website for research to scout out a highly rated school.  For our transracial family it is also extremely important for us to buy in a neighborhood that is racially diverse, for the benefit of our children.

Avoid homeowners association and fees. Been there, done that, paid the tax, not going back.

Buy a house that will work for 10-15 years. Yes, we plan on staying a while, so we have to really like the house.  A couple thousand dollars here or there will not make a huge difference on us in that kind of time frame, so focus on getting the right house rather than pinching pennies.  This one is mainly for me, the frugal nerd.  I could probably survive in a one room shack if it had a little land to play in, but that would never meet the needs of the Rockette our Pebbles.

Making decisions on paper as a couple is crucial if we want to make sure we make a good decision.  With these guidelines laid out, we now have the criteria to judge whether a new home purchase will be a good one.

Are than any other tips or principles that other readers have used or swear by?

{ 4 comments… read them below or add one }

John @ Curious Cat Investing Blog November 23, 2008 at 6:52 pm

Good thoughts. Guidelines are useful but that is all they are. I noticed in a previous post you had over $700 in the month for child care. I don’t have that expense. It only makes sense, everything else being equal, that I could put a higher percentage to a mortgage. Guidelines are useful but you must consider your personal situation when deciding what is the right decision for you.

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The Happy Rock November 24, 2008 at 1:47 pm

@John – Actually, there are currently two writers here @ The Happy Rock. DD has the child care, I do not. The point though is that guidelines provide you a point of reference to evaluate what you are doing against common wisdom that has kept people out of trouble for decades. If you are straying to far away, then you should either have a really good reason or you are taking on a lot of risk that isn’t easy to see.

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Adam Whitehouse April 10, 2009 at 5:08 am

Also wouldn’t hurt if your mortgage covers you if your ill or if you lose your job. Some banks can give you up to 3 months repayment breaks.

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Sandra April 17, 2009 at 5:37 am

Well great if you have no kids, now is the time to get your first house. Problem is most first time buyers will be young couples, so possibly fresh out of university and with limited funds. A great time for investors though.

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