Welcome to Week 3 of my debt-free living series!If you haven't read part 1 or part 2, you'll find:
Part 1 The early years: here
Part 2 Mistakes we Made: here.
What we needed to know:
Larry and I had been married for 3 years. It was that magical time when most couples purchase their first home. Being the facts, figures, and finance guru that I am, I decided that we needed to look at three basic pieces of information and then align them - sort of like a venn diagram.
1) Experts tell you that no more than 35 percent of your monthly income should be allocated for household expenses. In addition to your mortgage payment, household expenses include: property taxes, utilities, home maintenance, and house insurance. My eyes nearly popped out of my head when I realized how very, very little we really had to be able to make a mortgage payment and still remain fiscally solvent!
2) Remember that big, green pile of cash that I kept eyeing longingly? We had to decide how much of that stash we were able to use as a down payment. We looked at our hard-earned bounty, which by this point in the game was seeming smaller by the minute. We still hadn't quite made the leap to giving every single dollar a job, but, we decided using 75% of our cash was reasonable - leaving us with 3 months of expenses as an emergency fund.
3) We found out how much the bank would loan us. Wow! Now that was a lot of money! Apparently having a steady job and no debt made the bank think that we were made of ... well... money! No matter what figure the bank gives you, be prepared to cut it. Seriously! There is no way you should ever borrow that much money!
Pulling it all together:
Now came the tricky part, pulling all three pieces into perfect alignment. We weighed our options carefully. Paying 20% down would allow us to skip the mandatory PMI (Private Mortgage Insurance) that was inherent in loans involving more than 80% of the value of the home. So, that magical 20% down payment became our goal. In order to "right size" our mortgage to match our down payment, we needed to cut the total amount the bank was willing to loan us by 35%. By looking at homes only in this price range, we could opt for a 15 year, instead of a 30 year mortgage. Sighing, I wrote down a solitary figure on a scrap of paper. It represented our perfect purchase price. I cried. Seriously, I did cry! We did the only thing we knew to do: We began to pray. This seemed like oddly familiar ground. Remember, we "prayed in" the little white house just a few months into our marriage.
While our decidedly tight financial circumstances could have been drastically depressing, we took an optimistic outlook and began looking at homes. One dismal home after another met our weary eyes. Our price range meant either tiny, cramped, poorly built spaces or older homes in bad neighborhoods in need of a serious overhaul. Reviewing our list of "wants", we mentally crossed off items. Three bedrooms became two. Two bathrooms became one. Central air became window fans. We were being forced to separate our "wants" from our "needs". Meanwhile, we continued praying for God to prepare a home for us, at the right price, in a nice neighborhood.
Let the bidding war begin!
In September of 1992, we found ourselves in a 3-way bidding war for a home. All three couples had put in a bid for the same house, for the same amount, and on the exact same day. We won the war. That 20% down payment made the difference. They gave us the house because our financing looked more secure. The other bidders had offered 10% and 5% down respectively. Never in my life did I think that magic 20% number would have proven to be so critical to us getting the home that we wanted.
It was a 2 bedroom, 1 bath bungalow with a walk-up attic, built in 1930. Over 60 years earlier a local contractor had built it for his daughter and son-in-law. We were the second owners. The house had "good bones", beautiful woodwork, hardwood floors under the aging carpet, and lathe and plaster walls. The price was just $1000 more than my "perfect purchase price"!
The first year we lived there, we put on a new roof and updated the electrical systems. Then for the next four consecutive years, we saved every extra penny we could, making the equivalent of double payments. Every few months we wrote a second payment check and labelled it "Apply to principle only". I double-checked each time, to be certain that the bank had, indeed, applied it to the principle and not the interest. I quit my job at the end of November in 1996, as we welcomed our first child into our family. Our income was cut by 40 percent! Larry made the final house payment in February of 1998, just over five years after we took possession.
Next week we'll talk more about "living lean". Over the next thirteen years we welcomed three more sons into our family, while setting aside the equivalent of our mortgage payment every single month. Our brand new, great big, nearly impossible goal became to purchase our next home with cash!
Our season of house-hunting was difficult for us on many different levels. We were not only praying for a home, we were also praying for a child. We went through years of infertility. I desperately wanted to be a mother and I wanted to stay at home with that baby. Looking back, I realize that God's timing was perfect. Had we bought a more expensive home, I would have been forced to choose between being at home with our children and going back to work to help finish paying for the house. I never had to make that choice. A year after our son's birth, we paid off the house.
Looking for your first home is a LOT of fun! You get to go to open houses on Sunday afternoons, look at how others have utilized their space, explore different decorating techniques, and try to envision your family in each home. Unfortunately, when you are house hunting while living beneath the median US household income, your dreams come into conflict with your reality in very short order! It's vitally important to place distance in your mind between what you want and what you can afford when searching through the current MLS listings. In your price range, finding the right house may be a time-consuming process. So, be prepared to take your time!
I remember going to family potlucks as a child and eating until I felt that I would explode. Those last few bites of chocolate cake sat on my plate uneaten. I was so full that I just could not bring myself to touch it. Food tastes SO good at a summer picnic. However, too much of a good thing quickly becomes a really bad, uncomfortable, painful situation when you take on more than you can chew. I vividly remember overhearing the adults declare to one another, "Her eyes were too big for her stomach."
That is the word picture I want you to remember when considering your next house. When you are living lean, each and every calculation you use on your journey becomes all that more critical.
Right-size your home and your mortgage payment and you will not be living under duress. But, when you overspend, the result is often uncomfortable and painful. You just don't want to spend years of your life worrying about whether there will be enough money to make your payments.