The Most Important Purchase of Your Life

The purchase of your home or primary residence

Most people forget that a home is a type of purchase. When we hear the word purchase we tend to focus on small-ticket items like clothes, shoes, or groceries. Perhaps it is because we tend to associate loans and mortgages with large-ticket items, while purchases tend to be geared towards small-ticket items.

In reality, a mortgage is really just a loan to purchase your home. When deciding on this purchase and larger purchases should be given greater contemplation. Yet it seems that we spend about as much time evaluating home prices as we do shoe prices. We need to be more disciplined and cognizant when considering a home purchase, especially if this is your first one.

Choose wisely when deciding how much you are going to pay for the price of your next home as purchasing too much home can have devastating long-term financial consequences. Without question, a home is certainly an investment.. You borrow money to purchase the asset (a house) that you expect to appreciate in value over time. Truth be told, I do not believe that purchasing a home is a significant wealth generator nor does it appreciate well over time. Residential real estate barely beats inflation to the tune of about 1% per year. I would hardly call that a significant wealth generator.

However, a home can be a wealth eliminator, if purchased incorrectly. Purchasing too much home will have long reaching implications that will devastate your finances. If you do not have at least 20 percent to put down on a  home, you are looking at too high of a purchase price.  

The benefits of putting at least 20 percent down on a home are:

• Smaller monthly payment
• Lower interest rates on your loan
• Less interest accumulated over the life of the loan (assuming you make the payments)
• No mortgage insurance (MI or PMI)
• Your offer will be more attractive to the seller

Be advised, the purchase of your home- especially your first home- sets off a chain reaction that may last for decades to come. Many of the successes (or failures) of your future financial journey depend on the decisions you make when you are young. If you overextend yourself on the purchase of your home you dramatically reduce the power of your savings. That should be reason enough to purchase a home well within your means.

The reality is nobody actually cares what house you are presently living in. Nobody cares how many square feet it is, how many bedrooms it has, or if it has a pool or exposed wood beams. Truth be told, the only person any of these things should ever have any meaning to (aside from yourself) is whoever you try to sell it to down the road. That's it. Technically, you will only ever need two people to "judge" the value of your home, you and whoever buys it from you.

With that out of the way, the single most repeated mistake in American society is over-mortgaging themselves on a home. This is commonly referred to as being "house-poor" or being "married to your mortgage". 

A more expensive home has implications beyond just a larger monthly mortgage payment. Consider that a higher purchase price will also have the following effects:

• Increased closing costs (when both buying and selling)
• Higher property taxes
• Higher homeowner's insurance
• Increased broker or lender fees 
• Increased commission to real estate agents (when both buying and selling)
• Mortgage insurance (if unable to make at least a 20 percent down payment)

If there is one thing that I consistently see that dramatically alters the trajectory of a financial journey, it is the purchase of your home, especially when considering a first-time purchase. If nothing else, understand that a home is a place of shelter and comfort. Truly assess whether you require such luxuries that high-priced homes afford or if you can delay those wants until you can truly afford them down the road.

Especially when you are young, the goal is to save and invest as aggressively as possible. Far to often, the roles are reversed. Mistakenly, people are doing things backwards by spending when they are young and trying to save when they are older. It should be the other way around. One of the largest impacts you can have on your savings is by diligently assessing the purchase price of your first home. Buying a house for even $5,000 over your true budget can have lasting implications that will be difficult to recover from.

Until next time...

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