Why I Bought My First House

Posted on November 27, 2007 by Eric 
Filed Under Housing

Those look like nice homesWith our upcoming move, I started reminiscing about the current house. I’ve been living in this house for 10 years now and I’ve got a lot of memories from this home. Here’s the story of why I bought my first home.

When I decided to buy my first house, getting one was the last thing on my mind. I was really looking for an apartment.

My brother had just moved in with me and we were living in a reasonably sized 2 bedroom apartment at the time. For just the two of us, it worked out well. The problem was that his fiancee was moving in, and with 3 of us, the place might start to get crowded.

We decided to start looking at a bigger apartment. Nothing huge, but bigger than where we were. At the time, there was a pretty bad rental crunch, and it was tough to find a place to rent. When we did find a place, it was generally expensive, and there were many restrictions on renting (longer term leases, pet restrictions, etc…).

A good friend had just bought himself a house 6 months prior and highly recommended going that route. I really hadn’t considered that idea at all (or even the idea of renting a house). After his suggestion, I decided to see if I could even qualify for a house, and how much I would have to spend.

It turned out I qualified for a Federal Housing Act (FHA) loan. I was a first time home buyer and wasn’t buying a very expensive home. This required that I only pay 3% down. Luckily, since I was sharing rent with my brother, and I had some savings. My parents were very generous and helped me with the down payment as well.

Because I wasn’t able to afford to put down 20%, I was stuck paying for Private Mortgage Insurance (PMI). That was annoying because all it really did was cost me an extra $100 or so a month and I got no real benefit from it (well, except I guess that someone was willing to take a chance with my loan because it was insured). It’s a “necessary evil” (or you can pay some more up front on the loan to get out of it but it’s not generally worth it).

I got qualified to look at homes in a specific price range (not to exceed the amount of FHA). For reference, I had already searched for large 2 and 3 bedroom apartments for rent and found that it was going to cost us about $1050-$1500 a month. Looking back I should have checked home rental prices as well but hadn’t considered renting a home. To buy a new house, I wanted it to be on the low end of what renting would be.

We started with existing homes closer to town (and work). It was tough to find something in my price range that I liked. We kept searching though, and I found homes that would work, but were not exactly what I was looking for. My realtor then suggested that we look further outside of town, and that he knew of some new home construction that was in my price range.

Immediately I found a home I liked (damn model homes – they will get you every time). I figured for sure it would cost more than a pre-existing home. It turned out, with incentives from the builder, it was actually cheaper to build my own home! And the price, after the options I selected, would yield a payment of $1120 (including house payment, taxes, home insurance, and PMI). This was on the low end of how much I was looking at for rent.

Also, my brother and his fiancee were going to be living there. Instead of paying rent, I let them cover the costs of groceries and most of the utilities. We had plenty of room, and I was even able to offer a room to a college friend who helped out by paying the rest of the utility costs. Overall, I think we all paid less per month than we had while renting. It was a great situation. Especially for me of course, because I now have quite a bit of equity in the house that will help out immensely once we move.

My “renters” moved out after a few years during the dotcom bust and I decided to refinance the house because interest rates had fallen so much. I got an Adjustable Rate Mortgage (ARM) (yes, looking back that probably wasn’t the smartest idea but at least it did work out). The rates had fallen at that time down to 4.5% for that 7 year ARM (that means it adjusts after 7 years – I think that’s at least 2 years off). When I switched to the ARM, I also decided to put an additional $100 per month toward the principal (less than what I was saving on monthly payments due to the refinancing). It really helped bring the principal down.

So now here we are, about a week away from moving out, and seeing this current house go. I do have a lot more memories about the house other than the financial ones I’ve mentioned here, but because it came down primarily to money on why I chose to buy my first house, I thought the numbers would be interesting to see again. Looking at it again I realize I made the right decision at that time. I hope I’ve set us up for the right decision in our new home. We’ve done all the work we could to make sure it will work out, but only time will tell if it was the right decision to move now. I’m hopeful that it will be for the best!

Image source tofslie

Comments

11 Responses to “Why I Bought My First House”

  1. Debbie M on November 28th, 2007 7:16 pm

    I have a very similar story except that I saw an ad claiming that one could buy as cheap as renting. I didn’t believe it, but I called the real estate agent on it. I had $5000 saved.

    It turned out she was sort of right except for the part about how there aren’t any one-bedroom houses. Actually, she was showing me condos. One that was in my price range had an exceptionally high condo fee that was to last for six months because they had gotten sued. That’s when I decided I didn’t like the unpredictability of condo fees, plus they were high anyway. I’d rather decide for myself whether to pay someone to mow, etc.

    So then she asked if I’d liked to look at houses in my price range. I said no. Then I said, “Wait. There are houses in my price range?” Most were too far away or too run down. Finally I decided to look at one that was too small: 700 square feet. This was only slightly bigger than my one-bedroom apartment. Still, I thought that if it were well-designed, it might be good. And it was.

    I was ready to bid on it, but then she had two more to show me: one that was too far away, and one that was a tiny bit too expensive. It was 1000 square feet and had a huge living room and great windows, so I bid on that house instead, offering just what I could afford. That amount was accepted. (Mine wasn’t new though; it was built in 1955.)

    I also got an FHA loan with PMI. I paid $100/month extra because it depressed me that only about $30/month was going toward equity! After a couple of years, I couldn’t resist the lower rates and refinanced from a 30-year to a 15-year fixed mortgage. This cost a lot in fees, but my P&I stayed about the same and my PMI shrank to almost nothing.

    I’ve always had a roommate, but could just barely afford it without roommates, which let me make good choices and have a recovery period between roommates.

    I was single. But because I worked at a university and was looking for low-end housing nearby, I decided that if I married someone who wanted to live someplace bigger, I could rent out my place to students. Eleven years later, though, I still live here!

    I definitely made some mistakes: I trusted my real estate agent to recommend an inspector. I thought I would like a big yard, but I don’t. I underestimated how much it would cost just to move in (appliances!).

    Overall, I think I could have had the same net worth now if had stayed in my apartment, but it’s nice to be a little diversified. And surely when I’m done in six years, the taxes, insurance, and repairs on a paid-off house will be less than the rent on an apartment. Right?

  2. Eric on November 28th, 2007 11:03 pm

    @Debbie M – thanks for sharing your story! I’m glad other folks have seen similar situations!

    I had a friend who paid something like 500 a month in condo fees. I had never heard of such a thing! It can be insane. Even though that covered his cable, internet, garbage, water, and parking, it still seemed high.

    When I bought my house, it was perfect for what I needed at the time. I live pretty differently now, and it doesn’t fit my needs as well it did in the past. It didn’t fit Melissa’s well at all however. The kitchen was far too small (I rarely cooked, but she cooks daily). We are both ready for a house that better fits our needs.

    Depending on your housing market, it’s entirely possible that insurance, taxes, repairs, and any other house related expenses will be less than rent. For me, that happened about 5 years in when I found out how much people were renting home for in my neighborhood. Right now, people already pay more than $400 a month more in rent than my house payment (including taxes and insurance) is. Repairs are pretty minimal, but even a large $5000 expense is equivalent to the price difference in a year’s rent ($400 * 12 = $4800). Now, if you figure based on the paid off house, my monthly payments (insurance + taxes) would be about $400. the difference then becomes (rent@$1450 – insurance&taxes@$400 = $1050 difference). In my opinion, the paid off house will save you more in the long run. Potentially a lot more.

    Thanks again for the great comment!

  3. FourPillars on November 28th, 2007 11:43 pm

    You just described my first home buying experience (except for the roommates!).

    I remember looking at some really expensive apartments and thinking they weren’t that great, visited some friends who had just bought and realized that it wasn’t as expensive as I thought and ended up buying! Worked out a lot better than renting as luck would have it.

    Mike

  4. Eric on November 30th, 2007 8:48 am

    @Mike – Thanks for the comment! I figured there had to be others out there with similar experiences. I know I was sure shocked to think I could buy a house for cheaper than I could rent an apartment. Plus, the equity I’ve earned in the home is worth it to me.

  5. The Carnival of Personal Finance #129 | Cash Money Life on December 3rd, 2007 6:47 am

    [...] A Penny Closer presents Why I Bought My First House. [...]

  6. TD on December 6th, 2007 1:32 pm

    I met someone paying a 500 condo fee last year, but it covered a lot of services (internet, phone, garbage, dry cleaning, upkeep, valet, etc).

  7. Eric on December 7th, 2007 10:02 pm

    @TD – I wonder if you add all of those things up if you actually work out better with that kind of fee vs. paying for all of the things separately.

  8. And The Winner Is... on December 8th, 2007 7:34 am

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  9. Chris H. on December 13th, 2007 3:46 pm

    Ha! You must not live in South Florida!

  10. Eric on December 16th, 2007 9:45 am

    @Chris – No, I live in central Texas. I realize my situation won’t fit the experiences of folks on the coasts very well. A friend from California told me about renting a home that is 1/4 the size of my home for twice the cost of my house payment. Different areas have different real estate situations. Sometimes radically different…

  11. Kimberly(new comment) on November 11th, 2008 8:58 pm

    I just bought a house on a corner lot & the owners owned 2 other lots ready that was 1 corner lot & a side lot. All around the property of the house. I got the whole deal for 145,000 & they pay 5,000 in closing. I think I got a good deal but with the economy the way it is I just don’t know with the 2 other lots. The other 2 lots are ready to build on but you can’t get the most money for the property.
    What does others think. This is in Spring Hill fl it is in the gulf side & about 1/2 way up the state.

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