Hi there.
Home ownership is one of the great American dreams. The problem is that the lender quotes you a number. It’s not the number.
If you’ve been renting for a while, you’re familiar with the monthly sucker punch that hits your bank account around the first of the month. That ongoing payment hurts because it feels like it’s just gone. After years and years of renting, you don’t have much to show for all those payments. What’s worse is that the cost of renting has steadily increased over the last twenty years.
The biggest thing to consider is that your monthly rent payment is the most you will ever pay each month for having a roof over your head. When you own a home, your monthly mortgage payment is the least you’ll ever pay each month. That’s because renting a home protects you from the other expenses: the tax bill, the furnace, the roof, the disposal, etc.
Ownership hands you all of it at once. You’re responsible for all of it. The monthly number that matters isn’t the loan payment your lender quotes you. It’s the loan payment plus everything else, and the gap between those two is where first-time buyers get surprised.
Here’s what actually goes into the number:
The mortgage payment. The number you got quoted.
Property taxes. They don’t negotiate, and they don’t skip a year.
Homeowners insurance. Your lender will require it, and it comes due whether anything happened or not.
HOA dues, if there are any. Worth asking what they were five years ago, not just what they are today.
Maintenance and repairs. The furnace, the roof, the water heater. A common planning assumption is one to two percent of the home’s value a year — which is a strange way to think about it, because most years it’s nothing and then one year it’s the roof.
Utilities. Almost always more than you’re paying now, and a lot more if you’re going from an apartment or a condo to a house. More square footage to heat.
The things you’re going to want to change. Nobody moves in and leaves it alone. Budget for it or it comes out of somewhere else.
Those costs are close to fixed. In a bad year you can cut back on discretionary spending like eating out or choose to skip the vacation. You can’t cut your property taxes or homeowners insurance. Every dollar that moves into a fixed cost is a dollar that can’t be flexible anymore. When times are tough, flexibility matters.
When looking for a home, you’ll hear guidelines like: “no more than two or three times your gross income,” or “housing costs under a quarter of your take-home pay.” Treat those as a starting point and not an answer. Some families will decide a house is worth stretching for, and that’s a values call rather than a math error. Just make it with the real number in front of you instead of the quoted one. Don’t forget that whatever number you land on has to cover more than the mortgage, the insurance and the taxes. (More on that in my values-based spending piece here.)
Here’s what gets tricky, and it isn’t about anyone being dishonest. A lender’s loan size and a realtor’s commission both scale with the purchase price. That’s not a knock on either one — it’s just that their incentive and yours point different directions. So an agent can steer you into more house than you’re comfortable with, and it’s easy to fall for, because it’s exciting! When you see that number, you want to use all of it. The preapproval number becomes a baseline, and it’s easy to get stuck on a number that your household income may only be able to justify on paper.
Don’t get me wrong. I’m not against buying a house. It’s important to recognize that buying a home isn’t just a financial decision. It’s a values-based decision. For some families, it will be a priority because the costs align with their values. For others, it may end up being a burden they have to get out from under.
The most important thing is that you price the whole thing out well before you talk with a lender or realtor. You need to understand what is comfortable for you and your family before bringing in outside pressure to purchase more. Don’t be afraid to wait.
Until next time, God Bless.
Ian
