Buying a house is one of the biggest decisions you’ll make in your life. Perhaps I’m not really qualified to write about this yet, as I have never purchased a house. But I am planning on purchasing a house in about 4-5 years, so I think there’s great value in learning as much as I can now so I’m better prepared when it’s time to start house hunting.
Reading about other financially-savvy people’s experiences has given me a perspective unique to most of my friends. Before I became consumed with finances, I thought I would buy a $500k house in the area I live now. We’d put down whatever we could, and pay off the rest slowly but surely. I had resigned myself to the false reality that being a stay at home mother was not possible in this economic climate. My fiancé and I would have to work for decades to pay off our house, and we’d try to get our parents to help out with child care as much as possible to avoid the costs of day care. We’d spend afternoons wondering how we’d ever pull it off, and if it was really even possible.
Then I opened my eyes. When I started getting interested in personal finance, the goal was to figure out what I could do to make my plan come to fruition. But instead, I learned that my plan was horribly flawed. It was based on one huge faulty assumption.
That faulty assumption was that I had to settle for the housing market in the area I currently live. Sure, we have ties to the San Franciso Bay Area that will make it difficult to leave, but buying a house here would be signing away any hope of being a stay at home mother, and setting myself up for a difficult financial future. That’s a big sacrifice to take just so you can live closer to your family and friends. After all, communication is easier than ever, and there are plenty of great lower cost cities that are a short flight or day-long car ride away.
It seems that pretty much everyone I know is living under this assumption as well. Many of whom don’t even have local family as an excuse!
Another excuse they may offer is, “sure it would be cheaper somewhere else, but I wouldn’t be able to make as much money there.” It sounds like a reasonable concern… until you actually do some research.
A quick Google search turned up a comparison in salaries between the high cost of living San Francisco and the relatively lower cost of living Portland. According to simplyhired.com, the average salary of an administrative assistant in San Francisco is $48k, and $39k in Portland. The Portland salary is about 19% less than the San Francisco salary. Other professions showed similar salary disparities. According to city-data.com, the median house or condo value in San Francisco is $751,600, and only $296,100 in Portland. The Portland house is about 61% less than the San Francisco house (and it’s probably bigger)! Call me crazy, but I’d be willing to move a 90 minute plane ride away from my family and friends to see a 61% decrease in housing prices with only a 19% decrease in salaries.
Inertia is a powerful force that keeps us from acting in our best interests. People do some crazy things just to avoid moving away from the place they call home. Here are a couple things some of my friends have said to me recently:
“I can’t wait until our PMI is gone. Just five more years!”
Since they couldn’t afford to put 20% down on their house, my friends had to purchase private mortgage insurance (PMI). PMI is insurance that protects the bank in case you can’t pay back your loan, but you’re the one who pays for it. It’s completely wasted money from which you get absolutely nothing back. My friends bought their house a year or two ago, so that means that after putting down a down payment, it would still take them six to seven years to build up 20% equity in their house. I have to imagine that they must have bought their house with practically nothing down for it to take so long to build up 20% equity. They would have been better served renting a small, less-than-ideal apartment for a few years while they aggressively saved up for a sizable down payment.
“Pre-qualifying for a mortgage loan will give me a better idea of what I can afford.”
No. No, no, no. Pre-qualifying for a mortgage loan will give you a better idea of how much money the bank will loan you. It will not give you any idea whatsoever of what you can actually afford. When I talk to home owner friends, they sometimes admit that they were amazed at how much money the bank was willing to loan them. All of a sudden, houses that you thought were completely out of your price range seem positively affordable. After all, why should you question the bank? Well, because the banks don’t have your best interests at heart. If you don’t want any children and would be happy working until you’re 70, by all means, buy the most expensive house the bank will let you. But if you want to have children, help them pay for their education, and save for a comfortable (and possibly early) retirement, you need to do your own math to figure out how much house you can afford.
So I beg of you, recognize that inertia is all that’s keeping you in your high cost of living area. Stop making excuses for why you can’t leave. Stop pretending that everything’s ok because the bank says so.
I’ll reiterate the point I started out with: buying a house is one of the biggest decisions you’ll make in your life. You must consider every aspect of your current and future finances before purchasing a home. Throw out all your assumptions about what you “should” do and start from square one. Hell, just look at real estate listings for other areas and you’ll start to wonder why on earth you should pay $750k for a house when you could have a, likely better, house in another great city for 61% less.