The dust has (mostly) settled from our home purchase. As a result, I thought it would be a good time to post an updated version of “the reckoning.” I also thought I'd share our reasoning for moving forward with homeownership at this point in our personal finance journey.
Please note that I have consolidated some separate accounts of the same type into one category for simplicity's sake. Additionally, I've listed our original reckoning amounts from 2012 to give an idea of the progress we've made.
Honey's Reckoning: Debts and Assets
Credit cards: $0 (was $4822.38)
Student loans: $89,559.05 (was $99,495.99)
Asset 1: Retirement, $43,084.52 in a 403(b) (was $12,240.41)
Asset 2: Emergency Fund, $5,000 (was $4,500)
Total debt paid off: $14,759.32
Total increase in assets: $31,344.11
Jake's Reckoning: Debts and Assets
Credit cards: $0 (was $27,660.55)
Student Loans: $99,263.43 (was $102,204.28).
Auto Loan: $0 (was $5,452.02)
Asset 1: Retirement, $26,595.74 (was $19,026.46).
Asset 2: Emergency Fund, $4,937.17 (was $2,194.77)
Total debt paid off: $36,053.42
Total increase in assets: $10,311.68
Joint Reckoning: Debts and Assets
Asset 1: Home, $225,000
Debt 1: Mortgage, $213,750
Some commenters have observed that they don't understand why we would choose to buy a house when we still have so much student loan debt. Here are the main factors that led to the timing of our home purchase.
1. We had downsized five years prior with the intention of buying a house eventually.
Jake moved to our city a year before I did, and he was renting a 3-bedroom house that cost $1,450/month. He originally wanted to buy, but I talked him out of it. Good thing, as this was 2008 and he would have lost a bundle when we entered The Great Recession!
Turns out that he had calculated how much he could afford to spend on housing while his student loans were in grace. Once he entered repayment, he was squeezed, and not even me moving in a year later was enough to plug the holes. In addition, the place he rented turned out to be an hour's commute for me once I got a job. I hate commuting.
We ended up renting a much smaller two-bedroom condo less than three miles from my job that cost $975/month. This allowed me to make some serious headway on my debts. Jake's progress stalled somewhat when he quit his job to start his own business after a series of stress-related health problems, though he did make some progress.
2. We had to move anyway, and Jake's new job meant we could qualify for a mortgage.
Generally, if you are self-employed, then mortgage lenders want to see two years of tax returns to prove that you have a steady income. That's why when we contemplated moving last November, we planned on continuing to rent. We ended up staying put because Jake was considering a change in his employment situation.
Then the place we'd been renting went into foreclosure. While it was stressful, it ended up being a lucky break for us financially. We didn't have any housing payments for five months, plus the bank gave us $2,000 to cover our moving expenses. However, those financial advantages came with a caveat: We absolutely had to move out by the first week of May.
Fortunately, we had enough advance notice of this to start house-hunting. Jake's employment situation had been settled, and the fact that he now had a steady paycheck meant we qualified for a mortgage. Additionally, we now knew the location that was going to work best for both of us in terms of commute.
3. The price was right.
Our area of the country was one of the hardest hit when everything imploded in 2008, and the real estate market here is still distressed. We wanted to buy while prices were still relatively low. At $225K, our house definitely cost a lot of money, but it's a really well-built house in a really desirable area. While we don't plan to move anytime soon, the idea of getting a bargain on something that is very likely to appreciate was appealing.
Additionally, because of our high credit scores we qualified for a 4.625 percent interest rate on our mortgage. While there are no guarantees, we think interest rates will rise significantly in the next year or two. Our abbreviated timeline meant that we weren't able to save as much for the down payment as we would have liked. However, we think we will save money in the long run because 1) we bought before home prices increase by 10 percent or more, and 2) we bought before interest rates rise by 2 percent or more. You can't time the market, but we feel good about our assumptions.
Our housing payment (principal, interest, taxes, and insurance, or PITI) ended up at $1,400. This includes private mortgage insurance, or PMI, which we have to pay because we put 5 percent down instead of 20 percent. Coincidentally, the place we almost rented back in November was also $1,400/month. We already knew we were comfortable with that amount, even before Jake's salary increase.
However, the PMI on our home will drop off after eight years of on-time payments — sooner, if property values rise and/or we make extra payments. We obviously accrued some significant debt by making this move. On the other hand, our monthly payment is within parameters we'd set months before and will actually decrease by about $150 once we have the PMI removed.
In my last post, I said Jake had about $2,600 in savings. At the moment, he has just over $4,900 and I have $5,000. While we will probably set a goal for 2015 to beef up that amount, we feel that having almost $10K in liquid savings is enough for the moment, should a repair or unexpected expense pop up.
Of course I understand that different people have different risk tolerances and likely would have made different choices in my situation. Heck, plenty of people have avoided even being in my situation! However, buying a house isn't a decision we made lightly. And we are loving homeownership so far!
Have you ever made a personal finance-related decision that seemed to go against conventional wisdom? What was your reasoning, and how did it work out?
Honey Smith has been reading GRS since at least 2008, right when she got her first â€œrealâ€ job and started getting serious about finances. She and her husband Jake are in their mid-30s and recently bought a home together. Currently, she manages graduate programs at a large state institution, and he is an attorney at a mid-sized firm.
Between them, they have paid off approximately $30,000 in consumer debt since she started writing for GRS in 2012. However, they still have nearly $200,000 of student loan debt, so she will continue to chronicle their debt-paydown journey. In addition to personal finance, Honey is interested in vegetarianism and cooking, gardening (despite living in the desert and having a black thumb), issues in higher education (including the student loan bubble and the slow death of tenure), and animal rights; however, her heart lies with fantasy novels, trashy TV and Skyrim.