The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
It’s almost the American Way, going broke to buy a house.
After all, a house is the biggest of all purchases, and it takes just about every nickel that you have in order to make it happen. However, as common a practice as it may be closing broke can be a complete disaster from a financial perspective.
You’re better off to buy a little bit below your means, and make sure that you have some money saved up after you close on the house. Being broke is never a good state of affairs, and it can be even worse immediately after purchasing a house.
There may be major expenses right after closing
Whether the house that you buy is existing or brand-new, you can virtually predict that there will be one or more major purchases necessary after the closing. Often, it turns out to be a repair issue that did not turn up in a home inspection. It can also be a condition that wasn’t obvious at the time of purchase because the house was brand-new.
Whatever the cause, the may cost you a couple thousand dollars or more to remedy the problem. In other situations you may need to purchase a major appliance or system component. This can be anything from a new refrigerator to replacing the air-conditioning unit in the house.
You have to be prepared for this kind of outcome by having some extra money saved up after your closing.
Owning a house makes emergencies more likely
You know how everyone one tells you that you need to have an emergency fund? If that is true when you are renting an apartment, it’s doubly true when you own a house.
Every house, no matter how old, has repair and maintenance needs. Some properties, even new ones, can turn out to be certified money pits. For example, though it may not seem obvious at the time of purchase, you can find out that a brand-new house has water drainage problems that needs to be repaired. Didn’t see that coming!
And on an older house, the number of emergencies can increase exponentially. A leaky roof, wood rot, drainage problems, or backed up pipes are hardly uncommon. You’ll need to have money at all times in order to deal with these problems as they arise. This is even more true if you’re not the type who can handle repair and maintenance issues on your own, and you need to rely and paying outside services.
“You can’t eat a house”
A lot of people are so enchanted with the idea of finally owning a home, that they convince themselves that nothing else matters. I don’t care as long as I have my house! But that thought will do you little good if you have other expenses apart from the house itself – and you will.
Though owning a house can make excellent sense from a financial standpoint in the long run, it’s important to understand that a house is not liquid. This is especially true when you first take ownership of the property, since there is no equity to borrow against. If money is tight for you to buy a house, it will be even tighter after the closing. You’ll need to have extra money to cover any needs that you may have – anticipated or otherwise. If all of your money is tied up in the house, you’ll have a big problem – or a series of them.
Creating destructive patterns
The general thinking when buying a house is that you buy on a shoestring, and your financial situation will improve as time goes on. That’s typically true – your income rises and your expenses begin to settle down into a predictable pattern.
But sometimes the situation goes in a different direction. Sometimes you develop a pattern of “buying for the house”, always thinking that things will get better at sometime in the future. If you start getting used to not having money and using credit lines every time you need any, you could be setting up lifelong patterns that can land you in the poorhouse sooner or later.
Ironically, too much optimism when buying a house can set you up for just such an outcome. You could develop the “buy now, pay later” mindset, always thinking that the tight money situation you’re in now is only temporary, and that things will get better in the future.
They may, but it’s always best to not make assumptions.
Being broke just feels bad
As happy as you might be at the prospect of owning your own home, being broke has a way of throwing cold water on your celebration. Yes, you have your home, but if you don’t have money for an occasional dinner out or trip to the movies, or if you constantly find yourself borrowing from Peter to pay Paul that good feeling that comes from homeownership could start to get older in a hurry.
If you really want to enjoy your new home from the get-go, plan on having some money set aside for contingencies, emergencies, and extras after the closing. Going broke to buy a house – common that it is – is vastly overrated.
How about you all? How much of your monthly income generally goes towards paying for your house? Are you comfortable with the amount that you’re paying?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/danmoyle/5634567317/sizes/n/
