When I was 22 years old, I bought my first home.
There was a lot of pride in this moment for me. Up until this point, I had heard repeatedly that homeownership was one of the smartest financial moves you could make.
I’m an amateur personal finance geek.
Your tools have helped me become a smarter investor.
Personal Capital Dashboard User, February 2021
The house was situated in a young neighborhood walkable to parks, restaurants and a growing downtown area that made me feel like I was in college again. My new home was exactly what I needed.
Except I couldn’t afford it.
Quickly, I learned that I had set myself up in a situation that would make me despise homeownership instead of loving it. And it wasn’t just this one first-time homebuyer mistake — there were a lot.
Following are my five mistakes that you can learn from.
1. Not Understanding the Other Costs of Homeownership
The fact that I was able to put 10% down on my first home purchase had me beaming with pride. Saving up $20,000 on my $200,000 home felt like a huge accomplishment.
Unfortunately, that was nearly all I had saved up.
I didn’t realize the extent of the other costs of homeownership, including but not limited to:
- Home maintenance
- Utility Bills (heating, electric, water)
- Lawn equipment
- Dozens of other little things
Quickly, I became house poor. A sizable amount of my income was either going to my mortgage or these other “unexpected” homeownership costs.
Additionally, a lot of my time was being spent dealing with homeownership issues. A leaky sink, broken lawnmower, and a failing HVAC system were just a few of the worries I dealt with in my first year of homeownership.
Most of these problems were due to inexperience and human error, but nevertheless, I was feeling like the house owned me instead of the other way around.
2. Not Factoring in Private Mortgage Insurance (PMI)
Unfortunately, my 10% down payment was not enough to avoid Private Mortgage Insurance (PMI). This is a 1% fee that I had to pay to my lender for putting less than 20% down on my home purchase.
For me, that 1% was just another drag on my income that I wasn’t expecting. That was $150 per month (or $1,800 per year) that I would have much rather used for having fun with my friends!
3. Not Putting Enough Down
My first job out of college required a lot of travel. At times, I would travel for 10 days straight. My “weekends” would be on a Tuesday and a Wednesday, so I wouldn’t be able to really spend time with my friends. Then I’d be off traveling again.
After a year of this, I became burned out. I wanted another job that allowed me to work during the week and enjoy my weekends.
Unfortunately, that would mean a $10,000 pay cut. Evidently, you can get paid a premium for working the weekends!
After thinking about it for a bit, I decided to go for it.
I didn’t really analyze how this decision would affect my finances. This was when I really felt the pinch of my 10% down payment. My monthly payments on top of my PMI made my situation go from bad to worse.
My homeownership expenses took up more than half of my income at this time. I felt the crunch and quickly regretted my decision.
This is when I started to take on debt through a Home Equity Line of Credit (HELOC) and eventually used my student loans to fund my lifestyle as well.
4. Not Preparing for an Emergency
Eventually, I figured out that I needed to get some roommates. They would pay monthly rent, have a nice place to live, and I wouldn’t feel so much financial pressure each month.
That worked out great! In the process, I even made some lifelong friends who I still hang out with today.
And then the Great Recession made its way to my neighborhood.
All of a sudden, my home value plummeted. I owed $180,000 on the home, and it was now worth $100,000!
Because I now had no equity in my home, my bank told me that I could no longer use my HELOC. No equity, no HELOC.
Around the same time, my employer had to cut our pay for a period of time because our business wasn’t doing so well during the recession.
I was not financially prepared. My savings account did not have enough to cover one month worth of expenses.
Having an emergency fund would have really helped at the time. Personal Capital’s financial advisors recommend having a cash cushion of 3-6 months to help you through hard times.
You can use Personal Capital’s free online financial tools to budget for big expenses like a home. The Dashboard aggregates data from all of your linked financial accounts (like your checking and savings, credit cards, investments, loans, and more) so that you really understand your net worth.
When you’re ready to take on a mortgage, you can add the loan to your account and create a plan for debt paydown within the Personal Capital tools.
5. Not Understanding How Refinancing Works
The next couple of years were financially tight. I took on more debt as I continued to spend more than I made each month.
My saving grace was when I got a big promotion at work. With the promotion, my salary doubled.
With this new financial fortune, I was determined to eliminate my debt and start living within my means.
And I did — with some help from my new wife. We combined our income and started to make some excellent progress to improve our collective net worth.
With home values rising, I thought it would be a good idea to get rid of my Adjustable Rate Mortgage (ARM) at 5.25% and lock in a 30-year fixed rate at 5%. This would have worked out, but two years later, my wife and I decided to move to a new neighborhood when she was pregnant with our second child.
When we refinanced our mortgage, we paid $2,500 in closing costs to the lender. And did not save anywhere close to that with our refinance.
In fact, since my original mortgage was an ARM, the rate actually adjusted down over the next three years. So not only did we lose out on $2,500 in closing costs, but we paid $11,000 more in interest on our loan before we sold.
This was a $13,500 mistake.
Final Thoughts on First-Time Homebuyer Mistakes
As I look back on all of these stressful blunders I made, I’m not depressed by them. Actually, I’m thankful for them.
Having lived through this financially difficult decade of homeownership, I vowed to never do it again.
A few years ago, my wife and I paid off the mortgage on our “forever home.” We now live debt free, mortgage free, and recently crossed over the millionaire mark in our 30s.
These mistakes ended up being some of the best lessons I could have ever had.
Personal Capital compensates Andy Hill (“Author”) for providing the content contained in this blog post. Author is not a client of Personal Capital Advisors Corporation.