Real Estate Search Direct

Are you ready to be a first time home buyer? Many people are asking themselves that question now.

When Homer Buyer proposed to Ivana Newhouse she was planning to stay at her parents house until all her credit card bills were paid off.  She had accumulated quite a bit of debt while she was in college.  When you include the student loans, it was a considerable sum to repay.

Now that she was finished with grad school and beginning her career, she wanted to pay off her credit cards before getting further into debt.

She told Homer that there was plenty of room for him to stay with her at her parents while they paid down both their debts. Homer had also built up quit a bit of debt before he started working.

Ivana didn’t like the feeling of being in debt.

Homer was renting an apartment, but Ivana figured it was better to pay off most of their debts rather than contributing a large part of their income to have a place to live.

Homer didn’t like the idea of being dependent on Ivana’s parents for their home.  He valued his freedom too much, and didn’t want to feel obligated to her family.  Wouldn’t you feel uncomfortable living with your inlaws?

Homer also had studied some wealth building strategies and he had a different understanding of debt.  There are some debts he considered bad, but others that are good.

A debt that is used to earn more money than it costs to pay off the debt is good debt. A student loan can be an example of good debt.  You can earn more money at your job because of your degree than you would without a degree.

When that difference in income is enough to cover the cost of paying back your student loan, then it is a good investment.

Borrowing money on a high interest credit card to pay for a pair of shoes when you already have a dozen pairs of shoes is an example of bad debt.

Homer believed that investing in a house was a good type of debt.  He knew that the opportunity cost of not buying a house soon would far outweigh the cost of paying the mortgage.

He also believed that they would be able to pay off their credit card debt in a reasonable amount of time while making a mortgage payment.

Here are some of the points Homer made to convince Ivana that they should buy a home as soon as possible:

• Real estate generally appreciates over the long term.
• While a mortgage payment never increases and eventually is paid off completely, rent payments usually increase forever.
• Real estate prices are at the lowest point in many years.
• Mortgage rates are at the lowest point in decades.
• When the value of the dollar weakens due to government borrowing of trillions of dollars from future taxpayers, it is better to have equity in your home than dollars in the bank.
• Just how much is freedom worth?

Homer showed Ivana statistics that demonstrated that in most cases real estate values at least doubled over a 10 year period.  He challenged her to find someone who had owned their home more than 10 years that didn’t have a substantial increase of their home value.

He also told her that while living at her parents would make saving easier, they would eventually need a place of their own.  If they waited 10 years they would have to pay at least double for the same house, according to the statistics.

Real estate prices are down and might never be this low again.  Homer and Ivana could wait for prices to drop more, but would never know when prices were at their lowest until they started rising again. Then it would be too late to get the lowest price.

Even if prices do drop, but interest rates increase, they could end up paying more for their home over the term of the mortgage.  It isn’t likely to see interest rates go anywhere but up since they are at a record low now.

If they decided to rent instead of buying, the rent would usually increase over time.  They would need to pay more if they moved to their own place later rather than sooner.  If they bought a house now, they could lock in a low monthly mortgage payment that would never increase and would be paid off in 30 years.

Homer also believed that the country would soon be hit with extensive inflation.  The huge deficit spending of the government could not continue without the dollar weakening.  The $787 billion stimulus package is borrowing security from future generations and handing them our economic problems.

The US treasury bond which historically has been a very safe investment is now too risky for most foreign investors.

With high rates of inflation, paying back past debt at yesterday’s prices becomes less important than protecting  income from losing it’s value.

Many people are hording their money due to the economic situation, but money in the bank or under the mattress will be worth far less when the inflationary effects of economic stimulus hits.

Homer’s final point was the value of freedom.  How much is your freedom worth?  People have fought wars and died for freedom.  Homer was not prepared to sacrifice his freedom to save a thousand dollars on credit card interest.

This discussion brought up a point that should be considered by any first time home buyer.  They needed to sit down and create a financial plan for their future.

Homer and Ivana started creating their financial plan by analyzing their current financial situation.  They figured out the total of their income and their current monthly payments.

Next they decided to track their current spending and create a budget.

They also included an account in their budget for investments to fund their retirement.  They didn’t want to end up like some people who had to work into their seventies  because they didn’t have enough money to retire.

This gave them a starting point to figure out what changes would have to be made when they bought a house.

Becoming a home owner is a big responsibilty and Homer wanted to have a well thought out financial plan before he took that step.  As a first time home buyer he wanted to be sure he had the ability to make his payments and didn’t want to buy a house that cost more than he could afford.

He liked to learn from others mistakes rather than make them himself.  He could see that many people had made mistakes in buying their homes from all the news of foreclosures.  He didn’t want to become one of those  statistics.

If you are trying to organize your finances to buy a home, you should start by analyzing your finances.  A good start is to create a budget that details your income and expenses.

Track your expenses for the first month and see if there are any unnecessary expenditures where you can cut back.

Use the first month’s expenses to create a budget of how much you plan to spend each month for bills, food, clothing, whatever you think you need to have each month.

Set financial goals for saving for a down-payment, for retirement, for gifts, for a wedding or sending children to college.  Your goals are your own so include what you think is necessary.

Don’t forget to include a budget for vacations and entertainment.

See how well you can stick to your budget for a month and make adjustments as necessary. If you can’t live by a budget, do you really think you are ready to be a first time home buyer?

If you need help tracking your expenses and setting goals, try Moneytree budget software.  It makes it easy to get your finances under control.

Allen Davis
RealEstateSearchDirect.com