Let me break down the best way to buy a house with a mortgage. Saving up a down payment to buy a house (or home) is one of the most common goals I hear when coaching individuals and families. For many people, the American dream is homeownership. While there is this one common goal, there are a plethora of strategies to achieve it.
In a previous blog post, I walk you through, what I call, The Smartest Strategy to buy a home. Read that post to consider its truths and have more options to pray about when considering this move.
By the way, I will use the terms House and Home interchangeably throughout this post. A home could be something other than a house, so don’t get triggered every time I use the word “house” if you desire to buy a condo, for instance.
I call this The 5-10-15-20-25 Plan.
When You Buy a House with a Mortgage, Commit Second
As always, I believe you will never have real financial success and become wisely wealthy if you don’t pray first. When purchasing a home, the second most important thing to do is commit. You must be honest with yourself and your family about the decision to buy a house. If you can not with certainty commit to staying in this home for a minimum of five years, don’t do it.
Now I know there are unforeseen circumstances that may come up between now and then. You are not trying to predict the future precisely. But you do need to take your best guess and look at your long-range plan. Forecasting is a pivotal part of all financial goals, especially when you buy a house with a mortgage.
If you can only see your family living in this home for a couple of years, you will not be able to recoup your initial investment. It cost money to buy a house and even more to buy a mortgage. There are moving costs, closing costs, initial costs, and unforeseen costs. For example, most people spend an additional 5-10% on renovations they had no plan of doing. It’s just that once you move in, you have an internal need to make it yours. Customizations come at a cost.
As you may know, I am a Ramsey Solutions Master Financial Coach, and therefore follow the principles laid out in Dave Ramsey’s book The Total Money Makeover. This book teaches you to have a starter emergency fund of $1000 while getting out of debt and then fully fund it to 3-6 months of expenses after you are debt-free. As I wrote in a previous post, “you need an emergency fund.”
Well, I believe the smartest strategy would be to have at least a 10-month emergency fund when owning a house. The reason is because of the higher cost of everything. It will give you peace of mind like you would not believe. Now when the furnace, the dishwasher, and hot water tank all go out in 3 months, you can handle it no problem.
Plus, you can raise your deductible on your homeowner’s insurance, which will lower your premium. This strategy frees up more available cash to buy all the stuff you never knew you needed until you owned a home
Buy a House with a Mortgage the Right Way
There are many types of mortgages out there. I recommend a 15-year fixed rate convention loan. This flavor of mortgage is the only one that makes sense if you want to be debt-free ASAP. I’ve even tried a 30-year with the strategy of paying it like a 15-year. It didn’t work. Life happens and knocks you off your plan if you leave open the opportunity. Besides, if I plan to pay it like a 15-year mortgage, why not just get a 15-year mortgage.
The trap is that the payment amount is less for a 30-year mortgage. So, you end up focused on the monthly payment instead of the goal of owning your home. Read The Smartest Strategy to see how you can change that mindset and start small. It will be worth it in 20-30 years when you have been building wealth instead of paying a debt.
Don’t Pay Their Insurance
Once again, I see people get house fever when they buy a house with a mortgage. They don’t have enough money to buy the home of their dreams (which become a home of their nightmares), so they take shortcuts. Even if you are smart in choosing a 15-year mortgage, you can still fall for this mistake.
Put down a minimum of 20%; more if possible. When you put down less than 20%, you must pay Private Mortgage Insurance (PMI). This additional fee is insurance for the bank to protect them against you defaulting on the loan. Don’t pay their insurance; this is a penalty. They wouldn’t see the need for this insurance if they didn’t have statistical evidence of your default probability.
Even if you have a different type of loan that doesn’t require PMI, it is not wise to put down less. You are far more likely to stay out of future trouble when you have put down 20% for a 15-year fixed-rate conventional mortgage. That combination is the best way to buy a mortgage. Ask any mortgage broker. With this formula, rejection is far less likely. I wonder why? They are no dummies.
Last But Not Least
When you are saving up a down payment to buy a house, keep this number in the back of your mind. After running the numbers, think about that final monthly payment amount. It’s referred to as PITI (Principle + Interest + Taxes + Insurance). When you sum up these four numbers, you will have your monthly commitment.
Keep that number at or below 25% of your beginning monthly budget amount. That is the average amount of Inflow you bring into your budget each month. Yes, after tithe, taxes, medical insurance, and all those other deductions. One quarter dedicated to PITI will leave you the other three-quarters for spending, giving, saving, and investing.
You may say that this strategy is too conservative. But I want you to be truly financially free, experience real joy with the blessing of God’s wealth. This blueprint is a plan to win. While those who don’t go this way may struggle, you will be living a dream come true.