Saving for a House

Ah yes, the seemingly impossible task for Millenials. This daunting and elusive purchase has been looming over me for a couple of years now. I would love to get us into a house and into home-ownership. But man, property is expensive!

Reading the struggles of others in similar situations to us, it is clear that homeownership is a scary prospect for many. We hear it all the time from our parents’ generation and the generation before: renting is a waste of money! A house is your greatest investment! Easier said than done, unfortunately.

Over the past few months, we have juggled the two (well, really three) options on what to do with any money over and above our usual expenses. We can 1) pay off debt 2) save for a down payment on a house 3) increase our savings/emergency fund.

As it stands right now, we have about $53,200 left to pay off in student loans, and $9,000 to pay off on my newly acquired Chevy Spark EV (a car I love by the way, and is saving us money at the pump. But I digress and will surely need to justify my purchase in a separate post, so stay tuned!). We carry an emergency fund right now of only $500. I contribute 4% of my income to a company 401k since I get a 4% company match and want to max out that free money. In a nutshell, we are very cash poor at this juncture.

About a month ago, I talked to a large national lender just to see what kind of mortgage we could prequalify for. I let the loan consultant know that I didn’t want to take out any more than $300,000. He ran through some numbers and returned with a rate of 3.49% on a 30-year mortgage with only 3% (or about $9,000) down.

Then, about a week ago, we met with a family friend who is a local realtor and chatted with her about what we are looking for, and some of the costs associated with homeownership. One item that I didn’t know much about, but is an important expense, is closing costs. Closing costs consist of a number of necessary transactions that essentially increase the amount of down payment you need since all of the closing costs are due right around when you wrap up a new house purchase. In our $300k house example, closing costs in Missoula would be estimated to be right around $6,600.

Even with making a minimum payment, and closing costs wrapped into it, we will still need to come up with about $15,600. But getting into a house with that little money definitely has some drawbacks.

If you own less than 20% of a house and finance the rest, the bank wants to make sure that you are good for the mortgage payment each month. To make sure that you are, you as the borrower are required to basically insure the interest of the bank against your property. For example, a homebuyer who puts down 20% on a house is pretty well invested in the home. They are very likely to continue making their on-time mortgage payments. But someone who only puts 3% down has much less “skin” in the game, and are more of a flight risk. They may not make their mortgage payment on time, or at all.

This insurance that must be bought by homeowners owning less than 20% of their house is called PMI, or Private Mortgage Insurance. It is a hefty addition to the monthly mortgage payment. Some quick calculations from our $300k house example show that without PMI added in, that mortgage (with property tax and home insurance factored in) would come to $1,590 per month. But since less than 20% of the house would be owned, PMI tacks on an additional $249 per month, upping the total cost to $1,839 per month.

All of these costs aside, it is important to realize that with homeownership, anything that goes wrong or needs to be fixed on or in the house falls squarely on the homeowner’s shoulders. When you rent, and the water heater goes out, you just call the property management company or your landlord, and let them know it needs to be fixed. If you own property though, that fix is coming straight out of your pocket! Homeownership, the more I’ve researched, is anything but cheap.

So where does that leave us right now? Well, we are planning for a few things, and hoping for a couple more.

We are scaling down our debt repayment to make only minimum payments both on our car loan and our student loans. Any money on top of that will be set aside in a 2-2.5% interest rate savings account. The goal would be to save as much as possible for that down payment and hopefully save a few thousand more on top of that to cover any upfront costs of moving into a new home.

It is hard to justify homeownership over renting in a lot of ways. But looking at the housing market, it’s hard to argue the fact that housing will likely only get more and more expensive, and with it, rents will only continue to rise as well. As I’ve heard some experts say: the best time to buy a house is when you need one.

We have a lot to consider as we aim at homeownership. How much total should we save? Should we buy a small house now and then upgrade later as we start a family? How much money should we put down? Can we even afford to look into buying a house right now? Well, I’d like to think this blog is aptly named. Just like you, I am just trying to make sense of this all as we continue Figuring Out Finances.

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