Earlier this year we were looking to buy our first house; I did what any sane person would “googled what to do”, and found a lot of advice on internet – some of those were pretty good. Talking to a real estate agent, first thing he asked was: “how much can I afford?” I guess that’s not an unusual question to ask, but it got me thinking. How much I can afford and how much I am willing to pay for a house are two different things!
While it’s good to know how much you can afford based on your financial situation, it’s important to understand the difference between affordability and willingness to pay. Making rash decisions while buying a house make you house poor; once you have decided the budget, you can always look up online calculators. Here are others things we considered:
- How big of a house: number of rooms, total sq ft. etc.
- Which area: Distance from work [and airport], downtown, other fun stuff to do, good neighborhood
- Floor plan: Open floor-plan preferably; didn’t think much about one vs 2 story
- Financing options: 15 vs 30 yr. mortgage
- Tax rate for the county
- Getting pre-qualified: while this is a good idea, it’s not necessary. I never got pre-qualified and I think it’s a personal choice
- Recurring cost after buying the house: taxes, insurance, utilities, etc.
After looking at, what seemed like, millions of houses, we were able to narrow it down. From my marketing analytics class, I remembered something cool [called lifestyle segmentation], and looked up the zip code of the house we liked. We eventually bought the one that we liked, and moved in few weeks later.
Following are few learnings that I’d like to share:
- Tax rate can vary significantly, sometimes within just few miles: there are more than 0.5% rate difference between the house that we bought and another house that we were considering few miles down the road – pay attention!
- Get the house inspected: even for a new house; as our inspector said, “I always find something, doesn’t matter whether it was just built”
- 15 vs 30 yr mortgage: this is a highly debated item, and there is a lot of information available online. [I can probably write a whole post just on this] I picked 30 year because of following:
- Since the mortgage rates are historically low, it makes more sense to invest the difference somewhere else
- I can always pay more if I like, but if I went with 15 year, there is no option to pay less
- If things go south, and I lose my job, I wouldn’t be stuck with higher payment
- Get money back on the commission that Real Estate agent gets: you can always negotiate this, but some companies advertise it too, Redfin being one of those – this helps pay towards the closing costs!
- Paying for mortgage point: this is another debatable item; in my opinion it’s not worth paying for, specially since closing cost + furniture + house setup will already set you back thousands of dollars
Hopefully some of these will resonate with you; If there is one takeaway from the story – let it be the fact that what you want to pay should be less that what you can afford to pay!