Time for Our First Home?


My wife and I make a combined salary of about $60,000 / year. We are both 25 years old. We currently have $55,000 in debt from credit cards, school loans, car loans etc. We live in a one bedroom apartment ($687 / mo) with a 9 month old son. According to our landlord he can be up to 3 years old in the one bedroom with us and then we have to move to a 2 bedroom which would be about $900/ mo. My question is this, if I have to pay $900 / month for an apartment, am I better off to try to get a mortgage on a townhouse and also reap the benefits of taxes? Or should I just get the 2 bedroom apartment for awhile and pay off debt? My plan was to save up $10% for the down payment on a $100,000 house. I have a debt reduction plan in place that should take us to 2001 to pay off.
Jeff S.

Jeff asks a question that many young couples will need to answer. When is the 'right' time to buy your first home? Not only are there a number of different factors to consider, but it's also the biggest financial decision they've faced, too.

Before we look specifically at Jeff's situation, let's collect a little background information. For that we go to the 1997 US Statistical Abstract. I noticed that a few of you gasped when you read the amount of debt that Jeff has. And you're right. It is high. The average amount of debt for a family under 35 years old is about $10,000 for credit cards, installment debt and lines of credit combined. But he's not alone. When many students graduate, they get not only a degree, but also a bill for all their college loans. Add a car payment or two and it adds up pretty quickly.

Next for some housing info. About one third of families in the 25-29 age bracket own their own residences. And the cost of those homes keeps going up. We found that the median price for a home was $118,000. Naturally, there's a big difference depending on where you live and the size of the home.

Now let's take a look at Jeff's situation. The first consideration is monthly expenses. We'll assume that the apartment will stay at $900 per month. Compare that to owning a home. There will be a mortgage to pay. Suppose Jeff saves a $5,000 down payment on a $100,000 house. A 30-year, 7% mortgage will cost him $632 per month. To that we'll need to add property taxes, maintenance, insurance and utilities. Say another $3,000 per year or $250 per month. Jeff will save a little in income taxes. It should be about $1,200. So his monthly expenses will be about $782 ($632 + $250 - $100).

It's important to look at the specific house you're considering when you do this exercise. In some areas, the property taxes alone are more than $3,000 yearly. Other older homes may require costly repairs that could consume big bucks in a heartbeat. Each house will be different so do your homework.

So far, it looks like Jeff should consider buying. The next question is can they get there from here. They have about two years to get ready for that house. During that time they'll need to get their debt down, save a down payment for the house and also put aside some money for emergencies.

We'll start with the debt. Jeff says that he's on track to pay it off by 2001. If he's paying $2,000 each month and doesn't add anything to the existing account, he'll have it paid off in 34 months. Two years from now when they want to buy the house he'll still have a balance of $18,500. Lenders won't like that balance, but the fact that they've been reducing it should help.

There's also still the matter of a down payment. If they can save an additional $200 per month and earn 4% on the money they'll be right at the $5,000 target in two years. To be safe it would be a good idea to have some emergency money available. If they could increase the monthly savings to $300 there would be a total of $7,500 available. The extra could come in handy if the furnace or some other major appliance breaks.

Cash will be a real issue for Jeff. That $60,000 annual income looks big. But let's take a look at where it goes. Taxes take about 20% or $10,000. Debt repayment takes another $24,000. Housing consumes about $10,000 (including utilities). We're down to $16,000 and still haven't considered food, medical, child care, transportation, other miscellaneous expenses and the down payment for the new home. We're talking about a very tight budget here.

The good news for Jeff is that he doesn't have to make the decision now. Whether he buys or rents in two years, he still needs to get out from under that debt as soon as possible. He has that plan in place. Once the debt is paid, that money can be redirected to saving for a down payment or prepaying a mortgage.

One final thought. You'll have friends tell you that you're saving on income taxes and building equity. And it's true. Up to a point. But for every dollar that you save in taxes you'll pay three or four in interest charges. And without prepayments, you'll build very little equity in the first few years of home ownership unless inflation returns.

Remember that owning a home opens you to unexpected big expenses. Building equity is fine, but it won't help if the refrigerator dies and your budget is so tight that you don't have the money to replace it.

Thanks to Jeff for an interesting question. We wish his family all the best.

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