By Timothy Ulbrich, PharmD
When I talk with student pharmacists about their financial goals and aspirations, purchasing a home is typically near the top of the list. Purchasing a home is often considered to be a milestone of adulthood and an escape from a renting situation.
So, is home ownership everything it is cracked up to be? Well, as you might suspect, the answer is “it depends.” Whether you are looking to buy a home soon or have long-term home buying aspirations, there are a few important considerations to keep in mind.
1. Determine where home buying fits in with the rest of your financial goals.
As you evaluate your personal financial situation and where you want to be in the next 5 to 10 years, you should reflect upon where home buying fits as a priority in the context of other financial goals (e.g., debt repayment, saving for retirement, building an emergency fund, etc.). Asking this question will allow you to put together a timeline for how much is needed to save for a home purchase and when that saving should begin.
2. Do the math on home buying versus renting.
In 2009, my wife and I bought our first home for $176,500. For those of you in high cost of living areas thinking “How in the world did you buy a home for $176,500?,” keep in mind we were living in rural Ohio when the housing market had just taken a big hit from the 2008 recession.
Prior to purchasing this home, we were paying $1,100 a month in rent, and when we ran the numbers on what our monthly mortgage payment would be (including property taxes), it was pretty close to our monthly rent payment. What I had forgotten was all the additional costs that would come along with home ownership, including private mortgage insurance (since we didn’t have a 20% down payment), homeowner’s insurance, higher utility bills, and maintenance and upkeep. Because of these additional costs, our rent situation was about 50% cheaper than our total costs associated with owning a home. The point here is to make sure you are factoring in all costs when making the decision whether to rent or buy.
Another important factor to consider is the timeline for keeping the home prior to selling. Generally speaking, the shorter the timeline of being in a home, the lower the return you will see on that investment, as any increase in home value that you benefit from during that time period may be trumped by the costs that are associated with buying and selling a home (closing costs, realtor fees, moving expenses, etc.).
3. Avoid becoming “house poor.”
If you decide that buying a home is the right move for you, consider purchasing a home in a way that prevents you from becoming “house poor,” meaning that so much of your monthly income is tied up in your monthly payment that you have limited remaining income to achieve other financial goals.
One strategy to help keep your monthly payment a lower percentage of your take-home pay is to place a down payment on the home at the time of purchase. Putting 20% down helps by eliminating the need for private mortgage insurance and securing a competitive interest rate—both of which result in more money in your pocket each month!
A second strategy is to determine your house purchase price based on a monthly payment that doesn’t exceed a certain threshold of your take-home pay. One recommendation is to keep your monthly payment to 25% or less of your household take-home pay. Therefore, if you earned $6,000 per month of household take-home pay, you would set the monthly payment for the home to be no more than $1,500, which is equivalent to roughly a $300,000 home financed over 30 years.
We are here to help!
Whether you are contemplating the purchase of a home, trying to figure out how to manage your student loans after graduation, or want to get started with investing, the team at Your Financial Pharmacist is here to help! We offer fee-only comprehensive financial planning at one-third the normal price for students. Furthermore, as an APhA member, you get 30% off the upfront fee for comprehensive planning services! Visit www.yfpplanning.com and schedule a free discovery call with our Certified Financial Planner (CFP) Tim Baker.