This is a guest post from MD of Studenomics. A personal finance blog for 20-somethings that want to kill debt, make some cash, and enjoy life. If you like the article, please consider subscribing for free updates.
In the North American society it’s no secret that owning a home has become apart of life. For many years the adage that, “renting is throwing away money,” was rarely challenged. As young people graduated from college and went through their twenties, buying a home simply became apart of life. Well, that is until the recent mortgage and real estate problems. Now the 20-something crowd is starting to challenge the home ownership axiom. Young people are worried about all of the mortgage crisis and all of the recession talk. Now buying a home doesn’t seem like the greatest idea.
Listen, I know I’m just some random blogger dude behind a computer screen. I can’t make the largest (or one of) decisions in life for you. However, I do feel good knowing that I can at least influence your decision or give you something to think about before you sign over the mortgage papers:
How stable is your job?
Buying a piece of real estate won’t completely kill your flexibility, but it will come pretty close to doing so. I don’t like giving financial advice to friends (you know all the legalities and stuff), but when someone asks me about buying a home, I ask the same question: how steady is your current job?
As a 20-something in today’s economy there’s no telling where you could end up tomorrow, a week from now, or a few months from now. Gone are the days of life long jobs and mega corporations never going down. Anything can happen. I don’t want to scare you. I just want you to open your eyes.
Then there’s your side of the stable job equation. How much longer do you see yourself working in the same company? Perhaps you’re sick of the job and are waiting to get out. You could be looking to leave the company and venture out on your own. You could even be looking to do some long term travel in the near future. The options are endless. Just because you have a job today it doesn’t mean that you’ll have one next week.
Key takeaway point: Consider your job stability before you decide on where you’ll establish home base.
How much money do you really have?
How much money do you really have for a mortgage down payment? Okay you have 30 grand. That’s cool, but do you realize how much of that 30 grand will actually go towards your mortgage down payment? Not a whole lot. Once you factor in the cost of a lawyer, real estate agent, moving costs, and relevant property taxes, you’ll realize that your 30 grand didn’t go all that far.
You need to take a realistic lo0k at your financial situation to decide if buying a home is right for you. Many young people don’t like the fact that they have a large lump sum of cash in the bank, so they feel the need to invest in tangible assets. Unfortunately, many home ownership costs are often overlooked and a decision is based without knowing all of the facts. At the very least, check mortgage rates to see how affordable buying a home really is.
Key takeaway point: Don’t assume that all of your savings will go towards the mortgage down payment.
What is the price difference between rent and mortgage?
This is usually the deciding factor for anyone that is on the edge of buying a home. If there’s a minor difference between all home ownerships costs (and I mean ALL) and rent, then the option of buying becomes very attractive. Unfortunately, many potential home-owners only look at the cost of rent and the cost of the monthly mortgage payment. All relevant home ownership costs need to be considered: mortgage, property taxes, maintenance fees, moving costs, potential repair costs, and insurance. Once you have considered all of the proper costs, you make a more educated decision on the largest purchase of your life.
Many of my readers from the Bay Area have made it clear that the difference between renting and buying is astronomically in favor of renting. In my opinion, it really depends on the area you want to live in. Nobody knows about your area better than you do.
Key takeaway point: Keep a close eye on the difference between rent and ownership costs when making your decision.
I hope I’ve provided 20-somethings with some food for thought when it comes to making a decision on home ownership. For further reading on real estate in your twenties check out my 2,00o word post comparing renting to owning a home.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I bought my house when a year ago when i just turned 22. I think it was a great decision. I put 20k down on a 97k house and my monthly payment is only $591 and thats including property tax and insurance. If you can take advantage of the down housing market and you have the money im all for that. My wife and I combine take home pay after taxes is about $3250 so we didnt go crazy or anything. We would be paying far more to rent.
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While there are many good points here. The 2 primary things to consider are (1) is the house going to hold it's price or appreciate over time (location, location, location) and (2) can you make the payment today. Most everyone starts their home purchase (and mortgage) wondering if they'll be able to afford to eat. But within a couple years, job changes, raises, etc. make the payment comfortable. So, if you can buy a good home without breaking the bank. Do it. You won't be sorry.
It's a tough decision for anybody in their twenties. I was a little skeptical about picking up a mortgage, but I have not regretted it since.
This is a well-thought out article. There are many factors in buying a home, as well as plenty of "surprise" costs. The most important thing (to me) for people of any age is to make sure you have a substantial down payment (15-20% or more) and also remember to get a 15 year mortgage. That is something I wish I had pursued more aggressively when my wife & I bought our home.
The other thing which it is MUCH easier to begin doing as a young person is to invest in the future with a 401(k) or Roth IRA. As a young person, you can put in small regular amounts and start to build a nice nest egg for your future. There is a report available also
"5 Biggest Problems With 401(k) Plans" which reveals some little known secrets of long term retirement saving. Anyone can have the whitepages report for free through my website.
Thanks for the positive reception to my guest post. I just wanted to say want thing. I'm writing with the benefit of hindsight and being only 22. There's information available to young people today that wasn't a mere 5 years ago. The recession is arguable the best thing that could've happened to our generation. Who knows what could've happened if the recession hit a few years later?
I don't want anyone to feel bad about decisions that they made in the past. There's no point to that. I just hope that 20-somethings read this article and heed the advice.
We also bought our first house about 5 years ago and in hindsight, we kind of rushed and made some costly mistakes. It was an exciting time with our new careers and the feeling that we were finally settling down and sick of renting for the past 10 years, but we certainly should have waited.
We now moved and bought a bigger house in a better area that is far more appropriate for us and our growing family. Now, we can't sell the first house and are left with making two mortgage payments each month. Live and learn!
I've purchased 3 homes alone in my 20's, and I regret the last two. The points in this article should be heeded. When I relocate this summer, I will move into an apartment for the first time in 11 years so I can avoid some headaches of homeownership that I've grown tired of. I'm focusing on my other debts and hopefully I will find a place I want to put down roots before I consider purchasing another house.
Another point to consider: The cost of real estate taxes, insurance and maintaining your home will certainly all increase year over year. You need to figure out if you can still afford this house in 5 years, so a good exercise is increase your fixed expenses by 5% annually and chart out the next 5 years. If you are not comfortable with the payment in year # 5- scale back a little or simply wait.
Remember, life gets in the way of your plans and you need to think of where you want to be in the short term future. Are you a two income household now, but want to cut it to one in three years to start a family? Do you want to be self employed in a few years, go back to school or chuck it all and back pack through Europe for 6 months? Your 20’s is too young to stress about a housing payment- make the decision that is right for you, not the masses.
Buying a home has been a wonderful experience for us, but it should not be done without some serious consideration. But, Don’t buy a house until you are debt free, or until you have children and need the extra space. Good word!
Agreed. There are so many factors that go into buying a home that many of us fail to consider in our grand plan. Personally, I wouldn't mind sacrificing the comforts of owning my own home until I pay off all my student loans because once you add in a mortgage along with trying to pay off student loans, not much actually gets paid off.
Many people today are buying homes in their thirties so I don't really feel a need to rush when I'm not financially ready and when the economy is still so horrible.
Another factor that people need to consider is whether they have other debts, like student loans. It is so much easier to pay off your student loans if you don't have a large house payment to make every month.
Don't buy a house until you are debt free, or until you have children and need the extra space. If you rent a one to two bedroom apartment, you will save a ton of money which you can use to pay off those student loans. Pay them off quickly, and then buy your house.
Very important points to consider in this article. My wife and I bought a house last year when were were both 23. We both have stable jobs and had all of our finances worked out to afford our home even after setting aside money for all of our goals and most of our wants. After owning our home for over a year now, the point that resonated the most with me was being stuck. Sure, we can afford our house, we are blessed to have money left over each month, but we cannot go anywhere. If a job opportunity opens up in another state, or even one hour away, I couldn't take it without selling our house. Buying a home has been a wonderful experience for us, but it should not be done without some serious consideration. Good word!