Will this be the year you become a homeowner? You ask this question because you almost saved enough to buy a starter home. Or is it better to wait, save, and buy your perfect forever home?
Many first time homebuyers struggle with this decision.
The best way we can answer this very frequently asked question here at Point Equity is to tell you the stories of Family A and Family B. You may recognize yourself in one of their stories. Take note - this is a cautionary tale! Read on and see what we mean.
Save for a Down Payment
Our stories begin with two families starting their lives -- dreaming and planning their futures. They make many decisions including how big their family will grow, where they’ll live, and what their future home will look like.
But this is all the two families' stories have in common.
You see Family A sees their future absolutely perfectly. There’ll be kids, pets, nice cars, and great vacations. And the house - wow! It’ll be big, beautiful, and perfect! They plan to work, save, and wait patiently to afford that forever home.
You see, their forever home was way over their budget when they dreamed of it. They did their homework, looked at dream quality houses they loved, and calculated how much money they needed.
They started to save and save. Month after month. Year after year.
Every time they’d almost saved enough, their real estate agent told them home prices had increased - again. No matter how much they saved, it was never enough to buy their forever home.
Meanwhile, the savings plan had set-backs as life happened. There were unexpected expenses, job issues, and babies coming before their perfectly crafted timeline.
They didn’t give up but moved several times to accommodate their growing family, avoid large rent increases, and find a better school district. They were proud that they stuck with their plan. For a long, long time.
Save Less and Buy Now
What was Family B’s story? Well, it was different from Family A’s story - in one way.
Family B had their kids, pets, and vacation dreams too, much like Family A. But they decided to just buy a house - as soon as possible. Not a big house, or the best house, and certainly not their forever house. It was going to be their “starter house.”
You see, Family B knew interest rates were low and they could make a down payment as little as 3%. They quickly met with a loan officer and real estate agent to make their plan.
Here’s what it looked like.
They decided on a purchase price of $350,000 with a 3% down payment, or about $10,500. They added another $4500 for closing costs and miscellaneous moving expenses, which brought the total to $15,000. It took them three months of savings to reach that goal.
Soon they found a good house (but not their dream house) and bought it with a 3%, 30-year fixed mortgage. The monthly payment was $1431 ($300 less than they paid in rent.) As soon as they got the keys, they moved in!
Over the next four years, the value of their home, and the other homes in their neighbourhood, increased by 4% - every year. On top of that real estate appreciation, they accumulated another $29,673 from the principal portion of their monthly payments. (Which, remember, were less than the rent they’d been paying.)
The Value of Real Estate Appreciation
Things were looking good for Family B. They sold their home for $409,450 - as a result of the annual 4% appreciation since they purchased it. After selling expenses and paying off the mortgage, they had enough cash to make a 15% down payment on their next home.
Here’s a breakdown of all the numbers:
Purchased first home for $350,000
[FannieMae loan with 3% down ($10,500), 3% interest rate, monthly payment $1,431.]
Home sold for $409,450
[~4% Year over Year appreciation for 4 years]
Deduct 7% sales cost -$ 28,661
Pay-off mortgage balance -$309,828
Net Cash (Equity) $ 70,961
Family B made $70,961 from the sale of their first home and, during those four years, took advantage of tax deductions for mortgage interest and property taxes. They found out rent on their old apartment had increased $300/month over the four years and did a little happy dance.
Moving Up to a Forever Home
Family B bought their next “middle ground” home for $473,000. It was bigger and better, but still not their forever home. They used $70,950 for a 15% down payment and got a $402,050 30-year fixed mortgage at 3% interest.
The monthly payment of $1,695 a month was still $300 less than the rent on their old apartment.
And just like that - four years passed and Family B was able to repeat the process of selling and buying. This time - they bought their forever home.
Homes in their area continued to appreciate 4% every year, helping them sell the ‘middle ground’ home for $553,300.
The loan balance had been paid down to $367,000, and after real estate and selling expenses (approximately 7%) they’d accumulated equity of $147,570.
Owning a Home and Saving, Too
There’s one part of Family B’s story we haven’t mentioned. Remember when the payments on their starter home were less than their rent? Well, this allowed them to continue their monthly savings while owning their home.
Yes, just like Family A, unexpected costs (and babies) impacted their savings, but since they’d locked in their biggest expense (their home) they successfully saved over the years.
After 8 years, some of their savings were added to the accumulated equity from their home and they finally bought a forever home. Their very big and very beautiful dream home.
Here’s how the numbers looked:
They made a 20% down payment to purchase their forever home - with it’s four bedrooms, 3 bathrooms, and 3 car garage - for $760,000! Another 30-year fixed mortgage at 3% interest gave them a payment of $2563 a month.
They used $4,430 from their savings to get 20% down ($152,000) on this final home purchase. Over eight years and three homes, Family B needed to use savings of $10,500 for their first down payment, plus another $4,430 for their final one.
A grand total of $14,930 in savings went into their forever home. The rest came from the steady appreciation of home values, year after year.
There’ve been many benefits since Family B jumped into that first starter home, including their children starting and remaining in a good school district as the family moved from starter, to middle ground, to forever home.
And Family A? They’re seriously considering buying a starter home now.