In last week’s post on mortgage rates, I explored how interest rates and down payments impact the cost of purchasing a home. For the purposes of my analysis, I restricted the variables to these two factors. I recognize that my analysis only looked at two sides of a very complex story. As with all major financial decisions, the choice to purchase a home should be based on more than two factors alone.
When Mr. W. and I discuss purchasing a home, we rarely talk about interest rates and down payments alone. Here are some of the other factors that we’re constantly considering:
- Taxes: I didn’t discuss property taxes in my analysis since they aren’t impacted by interest rates or down payment. But these are big-ticket expenses that can’t be overlooked. Annual taxes in our area are about $7,000-$8,500 for a $350,000 home. On a monthly basis, that works out to be approximately half of what our principal + interest payment would be. Yikes! In addition, the tax records for these homes show that it’s not uncommon for taxes to spike by $500-$1000 in a single year, with no change in the property assessment. The taxes support a very good school system, so we understand why people are still clamoring to buy in this area. However, there isn’t an immediate need for us to live in a top-notch school district since we don’t have kids just yet. This high tax rate is enough to deter us from buying a home for several years.
- Insurance: One of our targeted neighborhoods experienced flooding during Hurricane Irene. Although this town is inland it has a large river that is prone to flooding. Obviously, we would buy a home that is far, far away from the river. However, it is possible that homeowner’s and flood insurance for the entire municipality will increase after recent events.
- Maintenance/Repairs: The cost of home maintenance and repairs can add up quickly. We enjoy working with our hands, so we plan to take care of all indoor and outdoor home maintenance ourselves. We’ll also take care of any non-structural improvements. Nonetheless, the tools and materials will cost a pretty penny...money that we probably would not need to spend as renters. For instance, Mr. W. made me this kitchen island as a wedding gift (love that man!). Even though it was a DIY project, the materials still cost around $200 since he used high-quality lumber. Yes, it was a savings in comparison to the $500 inspiration piece from Crate and Barrel. But it certainly wasn’t cheap!
|He gave me an island (no, not THAT kind of island!)|
- Job/income stability: This probably goes without saying, but I would remiss if I were to exclude job/income stability from the equation. Mr. W. and I both work in salaried positions, so we know precisely how much we’ll bring home in any given month. This makes financial planning easier than if we worked on commission or as contract employees. Mr. W.’s job is very stable, with good pay. My job is less stable, but the pay is a little better. If my employment situation changes, we don’t want to have made commitments that leave us scraping the bottom of the barrel.
- Debt-to-income ratio: Right now, Mr. W. and I have monthly debt payments of $366 for his car loan (36 months at 4.6% interest). Based on our combined income, we could comfortably afford a $350,000 starter home. But once we buy a house, we would like to be able to cover our mortgage and car payments with the lower of our two salaries (see above). And, we should also have enough left over to pay for car insurance, utilities, and groceries. This is a very conservative approach, but we think it’s best for our peace of mind. We don’t want to sign a mortgage and then spend 30-years worrying that we may not be able to afford it. Based on a back-of the envelope calculation this means…we need to earn more before we buy a home.
- Appreciation: Given our proximity to New York, we expect home prices to increase considerably once the economy has made a full recovery. The fear of being “priced out” of our preferred neighborhoods causes us concern. This is an argument for buying sooner rather than later. However, we also don’t want to rush into the decision to purchase a home.
- Local economy: the local economy is relatively robust and diverse, thanks again to the Big Apple. However, if the local economy were structured in such a way that it revolved primarily around one specific industry (automotive, tourism, oil, etc), the housing market would be more dependent on other economic conditions, whether favorable or unfavorable. I would be hesitant to buy in this situation.
- Geographic stability: Mr. W. and I may decide that we want to try living in a different city/state before settling down and doing the “two kids + golden retriever + white picket fence” thing. As long as we remain open to relocating in the near future, renting is probably the better option for us. It’s much easier and less expensive to break a lease than it is to sell a home. If we buy and sell the same home within five years, there is a strong likelihood that our mortgage would be underwater, even if we put 20-30% down and even if the home value has appreciated by 3-4% annually.
- Other personal or financial goals: Mr. W. and I have toyed with the idea of pursuing additional educational/professional development opportunities. These endeavors would be costly and would not be subsidized by our employers. We haven’t yet determined whether the investment of time and money would be worthwhile. However, it makes sense for us to maintain some liquidity in our assets so that we can pursue these options if we so choose.
What factors impacted/will impact your decision to buy a home? Are they the same factors as we're considering?