Should I Buy a House?

A friend of mine recently bought a house, and he said: ‘I switched from renting a house to renting money to buy a house. I still don’t own sh*t.’ I thought that was pretty spot on.

“If you want to!” Is the shortest answer possible to the question “should I buy a house?” The longer answer is, “if you understand all the costs, the risks, and have a plan in mind, then sure!” I am going to answer the first part in this letter: the costs.

Scenario: You are buying a home listed at the current average price in America: $436,800. You are taking $349,440 in a conventional loan with a 20% ($87,360) down payment. Unless you’re taking a VA loan, 20% down is usually required or you have to pay mortgage insurance which is very expensive.

Getting the Loan:

Before you even ‘own’ your home, the costs start adding up. During escrow, you will have to pay for inspections, appraisals, and earnest money (which counts toward down payment). Then, to get the loan, there is a horrible thing called closing costs. These are all the costs associated with the actual transfer of money including: origination fee, commissions, interest, and more. They range from 3-6% of the loan value. Depending on the contract, you or the seller will have to pay for them. In a seller’s market, the buyer is usually paying all of them. We will add 5% of the loan for closing costs and expenses during escrow: $17,472. Total cash needed to buy the house: FHA Loan - $104,832. VA Loan - $17,472.

Paying Off the Loan:

Right now, the average interest for a 30 year, fixed mortgage is 6.71%. That means the total cost of a $349,440 loan paid without any additional/early payments would cost you $812,584. That is $463,144 in interest alone! You are paying more than double the loan to buy the house. But don’t panic! 30 years is SO long… (Say it with me) How! Long! Is! It!

30 years is so long that you could profit $3,823,673 by taking out a loan!

Lets say, hypothetically, you have $436,800 to buy a house, but instead of buying the house in cash, you take a loan and invest the remaining cash in the S&P 500. In 30 years, the value of your $349,4400 investment with no additional contributions into the S&P 500 would be worth $4,636,257!! (assuming 9% growth per year which is conservative based on past performance). All that to say, yes, the interest on a mortgage is a lot, but don’t let the TIP (Total Interest Paid) scare you off. 30 years is a very long time.

Your monthly payment for P&I (principal and interest) would be fixed at $2,257; however, this doesn’t include taxes or insurance. Your interest rate is fixed, but your monthly payment can still rise every year.

*Note on Interest Rates: Since 1971 to June 2023, the average 30-year, fixed mortgage rate was 7.74% according to Freddie Mac (the industry standard). Current rates, at 6.71%, are below average. Anyone telling you that rates WILL come down and you can refinance in a few years is, at best, ignorant about the history of interest rates and, at worst, deliberately lying to you to convince you to buy a home. Don’t take my word for it though. Jerome Powell, the man in charge of setting interest rates, said on 14 June, “Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it.” I am not saying rates will go up or come down. I am saying that it is impossible to predict what will happen. But if we look back in time, rates are below average. If you take a mortgage today, assume that will be your interest rate for 30 years.

Escrow and HOA Payments:

Included in your monthly payment is a contribution to the Escrow Balance. This is a reserve of cash that the loan company maintains to pay insurance and taxes on your house. This is required by the loan company to ensure the house is protected from destruction and the government doesn't repossess the house for your failure to pay taxes. Your monthly escrow payment varies depending on your zip code but is usually around $300. Make sure you use a calculator that estimates the TOTAL monthly payments and not just P&I. Here is a good one.

Not included in your monthly payment is HOA payments, if you have them. Make sure you add those into your calculations!

Maintenance:

Here is the sneaky category of costs associated with homeownership.

There are some predictable maintenance costs. Each year I pay:

• $749 for termite and bug protection ($350 for termite, $99 per quarter for bug treatment)

• $396 for 2 x A/C unit servicing

The big pain of home ownership comes from the unexpected costs… Last week Jules and I had to pay $1,700 to fix four holes in our roof.

Everything can break. EVERYTHING. Your toilet, dishwasher, dryer, heater, door, roof, driveway, windows, deck, pipes, or electrical outlets can all break. If it’s in your house, it can break, and you are the one who gets to fix it or pay to get it fixed. New homes, old homes, ugly homes, and pretty homes are all able to break. You can purchase a home warranty to cover certain appliances, but I personally don’t think it is worth it.

If you buy a home you should increase your emergency fund. I recommend having an additional $5,000 set aside for home repairs. That will cover the ankle biters: appliance repairs, windows breaking, small holes in roofs, small plumbing issues. The bigger costs like a new roof or A/C unit is going to cost you substantially more, around $15,000. These expenses are more predictable based on the age of your roof and A/C units. You can and should start to save for them. It is a matter of when, not if, you have to replace them.

Finally, there are the massive, unpredictable expenses - a pipe bursting flooding your kitchen or a hail storm destroying your roof and car. You have insurance for these events; however, there is stress attached to this that money cannot get rid of.

Okay, lots of expenses talked about. Let’s add it all up:

*to note, I am not adding in any expenses that you pay when also renting: electric, water, internet, etc.

Total Monthly Costs: $2,902

• P&I: $2,257

• Escrow: ~$300

• Fixed Maintenance: $95

• Variable Maintenance: ~$250

Cost to Close: FHA Loan - $104,832. VA Loan - $17,472.

These are rough numbers to get you thinking about the costs associated with owning a home. Like I said at the beginning, if you understand all the costs and still want to own a home, great! Later, we will discuss the potential upsides like appreciation, refinances, and more!

Here are some useful calculators I used when writing this letter:

Loan Calculator, Investment Calculator, Mortgage Calculator

Call to Action

If you are thinking of buying a house, start to define your budget. First, find your goal mortgage payment (typically less than 30% of your monthly income). Use the Mortgage Calculator to get an idea how much house you can afford.

What We’re Reading/Listening To:

Netflix Show: The Diplomat. What’s the point of buying a home if you don’t use it to watch amazing TV?

Debrief on Deck

Next week, Mike is going to dive into the IRA, Individual Retirement Account, world. He told me I can “save a lot on taxes by using one.” To which I replied, “I save a lot on taxes by never paying them.”

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (Twitter and Instagram).

Until then, stay the course.

Disclaimer