The First-Time Home-Buyer’s Guide | Part I

3D rendering of a house with blueprints, charts, mortgage application form, budget and calculator

2 Factors to Consider When Purchasing Your First Home

Having purchased my first home in 2020, I would like to share my firsthand experience to provide some insight into the process for anyone considering taking the leap from “renter” to “homeowner.” This article is the first in a series of three wherein I dive into the details of saving for, purchasing, and maintaining your first home.

Not long after moving into our Kennewick apartment, my wife, Joslyn, and I were beginning to outgrow our space; and while apartment living wasn’t difficult for our small dog, Missy, we found ourselves yearning for something bigger that included a yard for her to enjoy. This marked our first big purchase as a couple, but it was something we had been saving for since we joined the post-college workforce, along with our future wedding and retirement savings.

The Benefits of Buying vs Renting

When you rent your home, the monthly amount you pay to inhabit the space goes to your landlord. After you make your monthly rent payment, the landlord then takes those funds and uses them for property upkeep and the maintenance involved in the business of owning a rental property. On the other hand, with a house payment, that monthly amount goes toward paying down your mortgage. Since your name is on the deed of the house, you are both the landlord and the renter. In other words, you are paying yourself rent while simultaneously building equity in your home.

You can also take advantage of a concept known as leverage. Let’s say you own a property worth $200,000 at the time of purchase, and you put down 20% ($40,000). Some time passes and now the property is worth $210,000. Overall, the value of the property increased by 5% from $200,000 to $210,000, but your portion saw an increase of 25% from $40,000 to $50,000. Keep in mind the concept of leverage works both positively and negatively. There is a chance that the property could decrease in value. Of course, from a consumer perspective, renting definitely feels like the safer option. With no down-payment required, your main responsibility is to simply pay your rent each month (plus utilities depending upon the arrangement) while adhering to the terms of your lease agreement.

As prices in the Tri-Cities housing market continued to climb steadily, it began to look like the longer we waited the more we would have to pay for any house, dream home or not. All things considered, Joslyn and I felt we had saved enough (although not as much as we could have) and were ready to take on the challenge of homeownership.

Factoring a Mortgage into Our Financial Plan

A mortgage is something that requires a minimum monthly payment, and while homeowners know how much to expect each billing cycle, most do not know where the money is truly going.

Mortgage payments are made up of principle, interest, taxes, and insurance. Depending on the rate, the total interest paid over the lifetime of a 30-year loan can be almost equal to the amount of the loan itself. With today’s low rates, the impact may not be as great — but these interest payments still add up. For example, if you purchased a $300,000 house and put 20% down, you would need a loan of $240,000 to pay for the house. If your mortgage rate was 3.5% and you made only the minimum payment, the total interest paid over the lifetime of the loan would equal close to $148,000. That is in addition to the $240,000 balance already owed on your loan. So, the total cost of the house based on the mortgage alone (not including repairs and maintenance) would be the initial $60,000 that you put down plus the $240,000 for the amount financed, plus the amount of interest paid. The total cost of your house is not the original $300,000 that you paid for it; it is actually $448k to completely pay off the home and own it outright. Once again, this is just the cost of the mortgage. There are other costs associated with owning a home.

Down payment $ 60,000.00
Amount Financed $ 240,000.00
Interest Paid $ 148,000.00
Total Cost $ 448,000.00

Based on the numbers above, I would classify my primary residence as a lifestyle asset and not something that I would count on to behave like an investment. It is an expense that I have in order to live (“Live” would be used loosely here because owning a home is above the need for basic shelter). My intention going into purchasing a house was to have a nice place to stay, not to buy and sell for a profit.

Conclusion

The sticker price of your future house may feel misleading if you do not carefully consider the factors outside of your monthly mortgage payment. However, if you do your research, incorporate home-related expenses into your budget, and determine where homeownership fits within your financial plan, it is certainly a worthwhile investment.

If you have already done your research and are ready to begin saving, stay tuned. Next month I will break down the amount you will need for your down payment, how this amount is calculated, and what your lender will look for when you are ready to apply.

Brent Schafer

Wealth Planner, HFG Trust