Can you believe that saving for a down payment on a home might not be the smartest thing to do? It’s absolutely true.
Now, it’s obviously smarter to put some money down vs. no money down (that’s not what we’re talking about here). But, there are times where putting money down on a house might lead you toward financial suicide vs. financial success.
If you log in to Facebook, you’re bound to come across tons of posts by people who have bought their first homes and they only had to put down 3.5% as a down payment. Or, there are those who saved up thousands of dollars just to be able to afford and get into the home that they wanted. Sure, they ended up getting the house, but they certainly didn’t end up winning in the long run.
And here’s why…
1) It Doesn’t Count the Other Costs
When you buy a home, you are taking responsibility for all areas of the home.
Will that tree fall over in your backyard? You have to clean it up or pay someone else to do it.
Are there electrical issues that need a complete overhaul? Prepare to shell out a pretty penny to get it up to code.
If you’re only saving for a down payment on the home, you aren’t fully preparing yourself for all of the costs associated with owning a home. And let’s not forget that you’ll need to get all of the necessities and furnishings to put into your new home too.
Couple that with new bills for electrical, water, and more, and you’ll be spending a lot of money up front. Which brings me to my next point…
2) It Can Cause A House Poor Mentality
If you’re saving up just enough to put towards your house down payment, you aren’t saving nearly enough. This is where saving for a down payment on a house isn’t smart.
When something happens that requires some money up front, or if you’re constantly playing catch up with bills and the costs associated with owning a home, you’re more likely to have a house-poor mentality.
What is a house poor mentality?
It basically means that people feel that they can’t afford to live in their home, and in some cases, those people are right. Struggling to pay bills and fix items that need to be fixed is a terrible way to live.
You’ll be afraid to quit your soul-sucking job.
You will be afraid to have kids.
You’ll feel like a hostage in the home that you wanted.
…And no one deserves to feel like a hostage in their own home. Which is why just saving for a down payment on a home isn’t smart.
Another issue with the house poor mentality is that many people don’t have to feel that way.
But, banks and realtors will often entice people to buy homes outside of their budget, or at the very top of their budget. For example, did you know that the banks look at your gross income, not your net income, when deciding how much you can afford?
So, based on your net, you may only be able to afford a $150k home, but if they look at your gross, then you could afford $200k. But that bites you in the long run, because a $200k home comes with a higher mortgage, higher down payment, and possibly, even higher bills. You don’t want to be put into a trap like that.
3) It’s Not The Only Thing Standing In Your Way
Do you know all that comes with buying a home? Paying for inspections, insurance, and more, typically don’t fall in the realms of your down payment. For example, closing costs typically catch home-buyers off guard. Many don’t realize that closing costs average around $3,700 per home (at 2-5% of the home price).
When you’re trying to buy a home, your down payment is only part of what you need to pay before you even move in. If all you’ve saved is the 20% to put down, you’ll have to scramble (or save even longer) for other costs associated with buying the home.
Then, of course, you’ll need other funds for the…
moving process,
the items you need while in the home, and
the first month’s bills.
That’s a lot of money to come up with, on top of a down payment.
What To Do Instead
Instead of just saving for a down payment on a new home, there are three things you should/could do instead.
1) Create A Home Fund
On top of your down payment, try to add up all of the extra costs associated with buying, maintaining, and furnishing a home. Calculate these numbers based on the house prices in your area, and what you think you can comfortably afford. By comfortably, I mean no more than 25% of your take-home pay.
Once you’ve done that, start saving money in a separate fund and don’t even attempt to buy a home until you reach that savings amount.
Don’t get caught up in the house buying frenzy. Houses come on the market all of the time. And if you’re in a market where it seems like nothing ever comes up for sale, move or continue saving. It looks good to buy a home, but it’s not always the best option. Especially when you realize how many people have become house-poor in order to get one.
2) Look At Other Options
If you’re still saving for a down payment on a home, don’t forget about your other options:
Can you continue to rent for cheap?
Are you able to buy a multi-unit property and rent out the other side?
Can you live with friends or family while you save up some cash?
Don’t just try to buy a house because it’s the “cool thing to do”. There is nothing wrong with renting. There is nothing wrong with having roommates in a house. You don’t have to be a part of the “it” crowd who are buying houses. Trust me, a lot of them are broke or close to it.
3) Pay In Cash
If you can pay for a house in cash, that is a huge accomplishment and you should be extremely proud of yourself for having the discipline to save that amount of money!
If you can’t pay for a house in cash today, see how long it would take you to save that money. Imagine living a life where you don’t have a mortgage, and continue to save and rent while you figure it out. Paying in cash can even get you some major discounts because the banks or sellers will know you have the money up front!
What About You? What Will You Do?
So what about you? Are you ready to stop thinking like everyone else? Will you finally put your foot down and ignore the “wisdom” of those that are telling you to pay a minimal down payment and buy as much house as possible?
I hope you’re ready to ditch the normal and start thinking differently. If you’re not ready to buy a house and pay it off in 7 years or less, then you’re not ready to buy a house. You’ll be house poor, you’ll constantly be worrying about the next thing that will break (and then make bad decisions when they do break), and your house will simply consume too much of your life.
Your house is a place for you to sleep, be safe, and entertain once in a while. That’s it.
Buying a home can be a great decision, but only if you’re fully prepared for it. If you’re preparing to buy a home and just saving for a down payment, it’s time to rethink your purchase and make some adjustments.
Are you saving for a down payment on a home? Are you ready to retrain your brain?
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