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| 7 New Rules for the First-Time Home Buyer |
Submitted by:
Ray @ Tip Hero 09/17/2009 12:33 PM
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One of my favorite personal finance columnists is Ron Lieber of The New York Times, and in this week's column he covers 7 New Rules for First-Time Homebuyers. I was particularly interested in the article because I have been looking to buy my first home.
The article goes against what most people believed over the last couple of years during the great real estate bubble. Although the article calls them new rules, most of them are tried and true advice for home buying, like limiting your mortgage, taxes, and insurance to 35% of your pretax income, and to make a down payment of 20%.
Reading this article, I thought of a couple of additional rules I would consider, such as not thinking of your home as an investment. I always heard from family and friends that their home was their best investment. Well, when I ask them for the numbers, it doesn't pan out when they factor in all the costs, from taxes to insurance, from repairs to remodeling and landscaping and you name it. I'm not saying that real estate can't be a great investment, but for the typical home buyer, a home is a forced savings account with bank type returns.
Another rule that came to mind when reading this article is to not buy a home for tax reasons. People always bring up the tax savings/benefits of home ownership. Buying a home for the tax benefits, in my mind, is letting the tail wag the dog. What few people realize is that the real tax benefit is only the incremental amount of itemized deductions over the standard deduction, which you get regardless of whether you own a home or not. For some people, in certain tax situations, it does provide a decent tax benefit, but for many others, it provides only a small or sometimes negligible benefit.
Finally, a last piece of advice would be to try and strip out as much emotion from the purchase process as possible. There's a very good reason why advertisers spend millions of dollars on TV trying to associate emotions with products (car advertising being the best example). They want you to focus on the emotions the product elicits -- not the dollars and cents. Home buying is probably at the top of the list when it comes to emotional purchases. Before going out to look at homes, put pad to paper to figure out what you can afford and what you're comfortable paying. When you're deciding on whether to make an offer, make sure you have a handle on all the numbers, both now and in the future, and that you're comfortable with them.
The article closes with probably the best rule of them all: The "8-Hour Rule", which is not to buy a home that keeps you awake at night and keeps you from getting a solid eight hours of sleep. There was a famous investor back in the twenties, Bernard Baruch, who had a similar rule: "Sell to your sleeping point." If a stock kept him up at night, he would sell enough shares until he could get a good night's sleep again. For homes, Mr. Baruch would tell you to "buy to your sleeping point." A home is ultimately for providing you with shelter, security, and comfort, not to keep you from getting a good night's sleep.
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