Why To Think 5 Years Out When Buying Your Home

Simple way to avoid a $16,000 mistake!dog-at-home

Planning ahead is not natural for most of us.   When it comes to buying your next home, spending time thinking about the next 5 years of your life could be the most valuable use of your time ever.

I’ve sat down and advised literally tens of thousands of people during my career, and closed on over 3200 loans since 2001.   Based on my experience, the costliest mistake that any buyer can make is not what they get for interest rate on the loan, but it is not thinking about what your life will be like in 5 years.

When making the decision to buy a home, most people let their emotions take control and then blinders are put on, whether they like it or not.  People focus on so many details that won’t make a difference in their life such as what color the walls are in that house on Main Street, or how many cars the garage can fit in that house on Phillips Avenue.

Buyers really need to slow down and focus on one thing PRIOR to looking at houses; and that is what their life will be like in 5 years.  Not the next 5 years, but 5 years out.  You are in the middle of your life right now, so you can already see what is in store over the next few year, but you really need to do is stop and imagine your life in 5 years.

I am emphasizing this because most of us will not become independently wealthy over our lifetimes, so financial fitness should be a very important part of our life.  Lifelong financial fitness should be considered during every decision you make, not the decision to spend extra on premium fuel for your car, but what you are spending today that will affect tomorrow…like one or ten years tomorrow!

Don’t buy a house that fits your life today, buy a house that will fit your life in 5 or more years.

I have seen more people spend tens of thousands of dollars that they didn’t need to buy purchasing a home and then turning around and selling it a year later to buy a move-up home.  Here are some details of one of the worst decisions I have ever seen by a guy (we’ll call him Steve) that I helped buy his second home, only 13 months after buying his first home!

  • Steve bought first home for $119,000 in 2014
    • Real estate agent and sales tax fees paid was $7568.00 (by seller, but was built into the pricing when the seller’s agent set the market price of the home)
    • Steve paid $3900.00 worth of mortgage closing costs, inspection, survey, appraisal, etc. at the close.
  • Steve sold first home for $126,500 in 2015
    • Steve paid real estate agent and sales tax fees of $8045.00
    • Steve paid state transfer fees and other sales fees of $826.00
    • Steve paid (through splitting costs) of buyers closing and pre-paid item totaling $2530.00
    • Steve paid for a radon mitigation system at the buyer’s request totaling $1050.00
  • Steve bought second home that fit his lifestyle better for $250,000 the same day he closed on the sale of his home in 2015
    • Real estate agent and sales tax fees paid was $15,900.00 (by seller, but was built into the pricing when the seller’s agent set the market price of the home)
    • Steve paid $5560.00 worth of mortgage closing costs, inspection, survey, appraisal, etc. at the close.
  • Unknowns not considered – moving expenses, home insurance costs, maintenance and upgrades to first home, cost of time off work to buy, sell, move, etc.

In this example, the yellow highlighted items total to $21,911.00, that is a whopping $16,351.00 more than he would have needed to if he had just bought his “move up house” the first time!  This is real cash that came out of Steve’s pocket!  Most people don’t understand or pay attention to it since it is paid through the transaction, but it is real money that he could have saved and used toward the house he currently lives in.

Another, and possibly even bigger mistake is that he lost his IRS First Time Buyer Tax Credit.  I’ll blog about the unbelievable benefits of that program later, but Steve has essentially lost tens (yes TENS) of thousands of dollars in credit from the IRS toward his future annual income taxes.

If Steve had spent just an hour in 2014 thinking about his life he would have found that he needed to buy a home that wasn’t a starter, but was one that was a home that fit his lifestyle.  He was excited to buy his first home and emotions took over, big mistake!

You may be thinking maybe his income increased that year, but no, nothing significantly changed with Steve’s financial picture during that time.  He works the same job, has the same income, same savings, and same expenses and same family.

Steve spent over $16,000 he didn’t have to when  he bought the home that fit his lifestyle better.  Steve is young at only 26, and that money could have made a significant impact on his financial future, just calculate it yourself by using the Rule of 72- see Rule of 72.

My goal here is to ask you to slow down and push away your emotional thinking and think logically for an hour before you decide to look for a new home.  I think you will gain a slightly different perspective after that exercise and your retirement will thank you later.

Feel free to contact me if you want some perspective on your situation.

Until next time,

Craig

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