by Scott Henderson, AFC®
In last weeks post, I mentioned that we bought a house. So today, I want to focus on first-time homebuyers programs.
Buying a house comes with an overwhelming amount of decisions that need to be made.
Things like, “is now a good time to buy,?”
“Which lender should we use?”
“Should we look for a for-sale-by-owner house?”
“Do we have money for closing costs?”
“Should we have the seller fix certain things in our offer letter?”
“What are the houses in the area going for?”
“How can we get the best interest rate?”
On and on it goes.
When we first started looking at purchasing a home, I was told, “make sure you take advantage of any first-time homebuyers programs.”
I thought, “that’s great that they offer incentives to become a homeowner.”
My plan was to find the best first-time homebuyers program. After shopping around at three different lenders we had six pre-approval letters each with different terms.
What is a first-time homebuyers program?
When you hear “first-time homebuyers program,” what do you typically think of? Down payment assistance programs, closing costs coverage program, etc.
These programs allow prospective first-time homeowners to purchase a house with little to no money down and/or little to no money in closing costs. Such loans like the USDA loan require no money out of pocket but this was not available to us in our area.
On a typical conventional real estate investment transaction you’re required to put down 20%. For a $200,000 house that’s $40,000. Most people starting out don’t have that kind of cash sitting around so it’s not uncommon to have loans that only require 3% — 5% down for a primary residence.
Even at 3% down, we’re talking $6,000 and with closing costs, we’re easily talking about a minimum of 10K being due at the closing.
What about those people with good jobs and good credit they just don’t have $10,000+ laying around? With a first-time homebuyers program, this person could own the house with zero money out of pocket.
Now that sounds like an awesome plan!
Are they the best option?
Pros
Some of the pros of using a first-time homebuyers program:
- You want to become a homeowner but don’t have the money for a down payment or closing costs. This works for many first-time homebuyers.
- You have the money but don’t want to dump it into your house. You’d rather use it for something like pursuing a higher rate of return in the stock market or starting a business, etc.
- Lastly, you don’t qualify based on the normal terms and a first-time homebuyers program could get you into a house.
These are all perfectly good reasons to use such programs.
But is it the most optimal thing to do?
Cons
I compared the prequalification letters trying to decide which one was going to be the best. The biggest thing I focused on was the interest rate.
These were our three options:
- 3% down with up to 6% in closing cost assistance
- 3.5% down FHA loan
- 5% down conventional loan
With 2 & 3 we didn’t have help with closing costs and were required to put down more.
It would have made sense to go with the first option of only putting 3% down and paying no closing costs!
The second loan is an FHA loan with 3.5% down that was touting no PMI. Most lenders require Private Mortgage Insurance if you have less than 20% equity in the house. With this loan we would have to put $5,320 down and pay all of the closing costs (make sure you negotiate closing costs with the seller. It was a mistake we made).
The third option was a conventional loan with 5% which required us to pay PMI and pay for the closing costs. This is the one we decided to go with.
Interest rates:
- 5.75%
- 5.25%
- 3.75%
These might not seem like big differences but here’s how much in interest we would have paid over the life of the loan for each loan.
- $167,330
- $150,166
- $101,418
The difference between #1 and #3 is $65,912!
The question I have to ask myself is would I rather work an entire year or put down an extra $3,040 now in order to save myself $66,000 in interest? I think yes.
When you stack this on top of all of the other things I’ve mentioned on my blog, like cutting expenses and decreasing fees, you’re cutting years off your working career and you’ll be able to reach financial independence much faster.
I get that not everyone could put 5% down or more (especially in really expensive cities). And in no way am I shaming you if you did use a first-time homebuyers program.
My purpose in writing this is to point out the pros and cons of first-time homebuyers programs so you can make the most informed decision possible on your home purchase.
In our case, we decided the most optimal choice was not to use one.
by Scott Henderson, AFC®
We bought a house and finally became homeowners!
It’s been our goal for a few years to buy a house. We were pretty dead set on purchasing a house two years ago but didn’t end up doing that.
We met with a few lenders to get prequalified so we could start shopping around. But we couldn’t get qualified because we were both self-employed and you have to jump through a few more hoops in that case.
Last year, we could’ve bought a home in Utah, but were planning to move to Texas so that wouldn’t have worked.
This year, as soon as our lease was up, we decided to purchase a home. And we ended up buying five houses down the street from where we live right now.
My Mint Profile Is Now 100% Complete 🙃
For any of you that have been following me for some time know that I’m a big fan of Mint.com.
I’ve been using it for 5 years and it has always bugged me that my profile says it’s 90% complete.
It wanted me to add real estate to be 100% complete.
It probably sounds dumb but I was super excited to finally add a house into our financial picture to have a 100% complete profile.
Why We Bought a House
I was taught from a young age that it’s important to own real estate.
We decided to buy a house because it’s the American dream, of course.
Not really…
I’ve run the numbers multiple times and homeownership is not all that it’s cracked up to be. It’s a huge investment and the house starts to own you.
People always say buying a house is the smartest thing you can do and honestly, I don’t always agree. It’s a pretty illiquid “asset” or “liability” depending on how you look at it.
There’s multiple rent vs. buy calculators and it’s not totally clear what the best choice is.
We decided to buy it as a long-term investment, not to simply save money on our monthly expenses.
Our plan is to rent it out after living in it for about a year.
The area is great and it should rent out easily. We tried to follow the 1% Rule. Meaning, it should rent out for 1% per month of the purchase price.
For example, a house for $145,000 should rent for $1,450 per month. This is totally doable in Texas!
Being a landlord is a lot of work and most people don’t want the headache of trying to maintain a property. But I’m looking forward to it!
I grew up watching my mom invest in real estate and helping her mow lawns, clean up, and get them ready for new renters.
I learned a lot about real estate during this time.
I’m excited to be a landlord because someone else is going to pay my mortgage.
What We Paid
Lubbock, TX is affordable with a strong job economy and low unemployment.
When we starting looking, we wanted an investment property that we weren’t planning to live in. We wanted to buy a house around $80,000, fix it up, and get it ready to rent right away.
We realized we were going to have to live in it so we looked at buying a house that was $125,000 and then $145,000 and ultimately paid $152,000 for the house we bought with a little renovation.
The median home price in Lubbock is $130,000 so we ended up splurging.
It’s a great home that was built in 2016.
It’s 1,400 sq. ft., 3 bed 2 baths; it has a two-car garage, a big yard, a nice area, and our mortgage principal and interest is $668.
Our payment is low because mortgage interest rates are also low.
Some of you are probably thinking, “how are the houses so cheap?”
In Texas, the homes and land are cheaper AND we don’t pay income tax.
However, it all gets made up through property taxes. Property taxes in Texas are the second-highest in the country.
Our Interest Rate
When we got our preapproval letter they quoted us a 4.25% interest rate.
But a couple of weeks later, when I went to lock in the interest rate, it had dropped to 3.75% 30-year fixed interest rate.
Literally, the day I called the lender to lock in the rate, he told me rates had dropped and this was the lowest interest rate he had done in 2019.
With a 4.25% interest rate, we would pay $117,190 in interest over the life of the loan. But because we locked it at 3.75% we will pay $101,418 in interest (which is still crazy if you think about it).
But that saves us almost $16,000 in interest over the life of the loan!
A difference of about $40 a month.
I wanted to make sure we got the lowest interest rate. We considered first-time homebuyers programs but honestly, nothing looked great.
We went with a conventional loan and put down 5%. This gave us the lowest interest rate and didn’t require us to live at the house for any specific amount of time.
Some FHA loans require you to maintain the property as your primary residence for at least a year.
We’ve already made some mistakes that we wish we could go back and change But, hopefully, this is the first house of many and the more experienced real estate investors we will become.
Is It Smart to Buy a House?
So the big question is… is it smart to buy a house and will that help accelerate your path to financial independence?
If you want to maintain flexibility in your life and invest everything in index funds, renting might be for you. That works for a lot of people.
But, if you don’t mind the headaches of homeownership and possibly being a landlord you can build up equity and produce a positive monthly cash flow that could accelerate the amount of time it takes to become financially independent.
We’re excited about the new chapter of our lives and I look forward to building up a real estate empire one day!
