Most people never learn money or real estate; these are the best introductory homebuyer lessons we learned while buying our first 5 homes in a few years.
2Br/1.5Ba - A 2 Bedroom, 1.5 bathroom home (toilet, sink, shower, and tub each count as 0.25 bath)
ADU - Accessory Dwelling Unit or tiny home
Appreciation - Things going up in value, like land, businesses, and gold
APR - Annual Percentage Rate = interest rate
Closing Costs - $ required to get the loan, in addition to the down payment. Generally 2-3% of the purchase price
Condos - More affordable housing that tends to cash flow better and appreciate less (homes depreciate, land appreciates)
DP - down payment
DTI -Debt to Income. Monthly minimum debt payments divided by monthly income. Generally your monthly income must be 1.75-2.2 times the mortgage and other debt payments.
Earnest Money - The money you give the seller if you back out of the deal without cause
Home Inspection - Get one or risk having expensive repairs. Findings can be used to negotiate down the purchase prices
House hacking - renting out a duplex unit, room, tiny home, etc. in your home. This may be the fastest and safest path to millionaire status.
PMI - Private Mortgage Insurance, all homes with <20% down pay this and may be $100-400/month.
RE - Real Estate
Refinance - Adjusts your mortgage interest rate; generally a good idea if the new rate is >0.75% less than your current rate
Time shares - A scam
Tiny Home - Generally added to a property with an existing home to help pay the mortgage; love it.
My parents bought a home for $33k down, and 20 years later sold it paid off for $1M. That is 19% growth per year ($33000*1.19^20 = $1M) and a home to call their own. That's better than an index fund and it's their best financial investment, but 19%/yr would have been much higher if they...
1. Bought a smaller more standard home
2. Bought a duplex and rented out half
3. Instead of owning 1 paid off home, they owned 5 homes with 20% down each.
Not selling a home for 20 years was smart, though with a few more smart real estate steps, instead of retiring with $1M, you can retire with $3M or more.
1. Emergency Fund, likely in a low risk, high interest fund like VMFXX
2. Employer 401k match
3. Pay off credit cards and >7% interest debt
4. Start your Roth IRA + index fund like VTI
5. Save for a home, likely keep in same fund as step 1 or 4
6. Get pre-approved
Google "Ramsey Baby Steps" or "Money Guy Financial Order of Operations" for more info
1. Last 2 pay stubs
2. 1-2 years of taxes
3. Proof of funds
4. A sufficient DTI ratio
5. Credit score
The 3 most popular down payments options are
1. 3%, the minimum needed for most people; 3% on a $700k home is $21000, though the mortgage and fees tend to be higher
2. 5% is the most common for first time homeowners since it is the minimum for low-cost conventional loans
3. 20% is the most common among repeat home buyers since it eliminates PMI, saving $100-400/month
As of November 18th 2023, people can buy duplexes to fourplexes with 5% down payments to help cover their mortgage
An ADU, duplex, triplex, or 4plex counts rent counts towards your income for mortgage qualification, making it easier to qualify and afford the home.
1. Negotiate or refinance for a lower interest rate
2. Buy points (prepay interest)
3. Longer-term mortgages (30 or 40 yr)
4. Higher down payment
5. Shop for a lower insurance rate
6. Purchase a duplex, 4plex, or a regular home with a rentable tiny home; "house hacking"
You can buy points to decrease your mortgage interest rate (APR) or receive credits to decrease your purchase costs but increase your rate. I generally prefer to receive credits since rates may eventually decline
If you are going to invest a lot in index funds, get the 30-year mortgage. If you are high income and not good with money, consider a 15-year mortgage.
More info from Graham Stephen: https://m.youtube.com/watch?v=BJ3xhjqk52A
When you are ready to get a mortgage I will ask for multiple quotes and try to start a bidding war to see who will offer you the best interest rate and closing costs Tab 2: https://docs.google.com/spreadsheets/d/1r0m0m85W25VVhkZcdZhN7-IG8hebwCF6q7mPdP9-jvg/edit#gid=1823849657
Garrett Foss (Garrett@hometrustloans.com) has beaten every mortgage quote I've sent; highly recommend.
A quality home in a place you would want to live for 7+ years.
Other factors in tab 1: https://docs.google.com/spreadsheets/d/1r0m0m85W25VVhkZcdZhN7-IG8hebwCF6q7mPdP9-jvg/edit#gid=1823849657
If you pay on time, lower your debt, and increase your credit limit, consistently, then score goes up.
For me to invest in you, I want 720+, ideally 740+, to get the best mortgage rate.
See creditkarma.com to view your score and learn more
Your success in life is largely determined but how many uncomfortable conversations you're willing to have. If you don't ask, the answer will always be no. Negotiating the purchase price, financing, and terms can save thousands of dollars
Is the amount of the loan you pay off each month. It starts small and grows overtime to pay off the home in 15-30 years. In general, your principal paydown ROI will be 3-20%. Lower down payments and interest rates will increase your monthly principal pay down
CNBC reported that the median net worth of Americans are $6300 for renters and $255000 for homeowners. Instead of complaining about the problem, let's discuss a solution.
Say it takes ~$60k to buy a local $840k home and you can save an impressive $1000/month ($12k/year and 4x the median American!), in a region were homes appreciate 5%/yr.
Option A: Buy a home without help. After ~7 years of saving the $60k cost to buy a home balloons to $84k (math below), you will have saved $84k, and you can finally buy your 1st home. Mortgage payments have grown by ~40%.
Option B: An investor contributes 2/3 of the costs for half the equity. After 2 years, the $20k requirement grows to $22k and you can buy your first home, 3.5x faster. After 5 more years of home appreciation you have a smaller mortgage payment and $161000 in home equity, nearly twice as much as Option A. Even more when considering that the home loan is also being paid off.
Option C: We provide 2/3 of the purchase costs, you save over $1000/month, and your family helps. This is the ideal option.
While your investor initially lost money giving you ~$11k in home equity, they ended up with 3.7x more money in 5 years and a warm fuzzy feeling from helping a friend become a homeowner faster. Win-win.
Reference math:
(60*1.05^7) = $84000 (rounded)
7*12000 = $84000 = High achieving renter's net worth after 7 years
1.05^7 -1= 40.7%
(60/3*1.05^2) = $22000
(840000*1.05^7-840000*1.05^2+60000*1.05^2)/2 = $161000 = Homeowner's net worth after 7 years
(60000*1.05^2)*(0.67-0.5) = $11000
161000/(2*20000*1.05^2) = 3.7
ROI or Return on Investment is how we compare opportunities.
Home ROI = (Appreciation + Cash flow + Principal Paydown + Tax deduction) / Purchase Cost
Example Math
RE Total ROI = (700000*0.04 + 0 + 700*12/49000 + 3000*12*.22) / (700,000*0.07) = $35.9k / $49k = 73.3% ROI
The majority of that came from appreciation and PNW homes generally appreciate more than 4%. Index funds have a ~10% ROI while most small businesses have a negative ROI.