Back in November 2018, I announced to the world that I was going be buying my first home with cash. Not just my first home, but my dream and forever home.
Since then, I have been documenting my saving journey towards this massive savings goal on my Instagram.
Over the months, I have received a ton of questions about this personal decision. I also realized that after my announcement, I never really documented my reasoning behind this huge life decision.
Before I can get into the details, I need to lay the groundwork.
I started The Budget Mom, not to just share my story, but to bring awareness to the emotional side of money management. Every money decision we make is related to how we feel. Emotions are what drives us.
Sometimes that means that we need to make decisions based on what we feel is right in our hearts, not just the numbers. Without that feeling of peace, you can never feel successful with your money.
I found that peace.
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I am a single mom to my son James. I am a divorced mom. I know what it is like to lose everything, to leave behind the place you made and called home. To be lost, without a place to truly make your own. After my divorce, I knew that I wanted to buy a home where my son and I could lay down roots – a place that allowed us to grow, but also a permanent place that we could call home.
I knew immediately that I didn't want to move again. Playing the real estate game is not in my life plan. I don't want to fix up a home, buy my next home, only to do it all over again. I knew I didn't want to keep uprooting my son.
That said, I knew that my first home was not going to be cheap. When I started my search for my dream home, I made sure to document the list prices for the homes I liked. Houses that I could see my son and me in. I looked for the types of homes I wanted to buy, with the land that I wanted, and I made a savings goal estimate around my research.
LEAVING MY FULL-TIME JOB
From the very beginning, I had a plan to save up 20% for a down payment. From my house research, I knew that my dream home would realistically cost me about $400,000 in Spokane, Washington. This meant I would need to save roughly $80,000.
After becoming debt-free in November 2018, I saved enough money where I felt financially secure enough to leave my position in the financial industry.
I started researching the home-buying process. I wanted to know what it would be like for me to go through financing, and that's when I read about some scary news.
Being self-employed can make it more difficult to get approved for a mortgage because lenders have a harder time assessing your income.
When you are 100% self-employed, your income can fluctuate, and there's a chance that it could be so low that you cannot afford to pay your bills. Typically, a mortgage lender will require self-employed individuals to show two year's worth of self-employment income to prove they have consistent income.
There was one huge problem. My business was only three years old at the time, and for the first two years, it made a total of $25,000 net profit. That was not going to be enough to prove to a mortgage lender that I could afford the dream home I wanted.
PANIC MODE & FEAR
I knew I had to make a choice. Give up my dream of running my own company that desperately needed my full-time attention, and stay at my day job longer or get financing for a home with the resources that I had, which was only $30,000.
In my head, the only choice I had was to get funding for my dream home while I still had consistent W2 income.
Deep down, I also felt scared. The thought of being 100% self-employed while having a huge mortgage payment hanging over my head made me feel stressed. I would no longer have a consistent paycheck, and I was ultimately self-reliant on my business. It was terrifying.
So, I spent time rushing around, and I even scheduled a meeting with a home-lender. I knew I wanted to go with Spokane Teacher's Credit Union for home financing. I had a special relationship with them, and I have been a loyal customer for the past five years. They also have an amazing free Homebuying 101 Workshop that I was planning on attending.
I had posted on Instagram my fear of trying to find financing while self-employed, and how badly I wanted to leave my job so I could help more people through my business. Then, one evening, another blogger reached out to me and asked, “why don't you just pay for your home with cash?”
To be honest, I didn't even think about it. I also didn't believe it was a possibility. It felt like such a huge goal, which made it feel impossible.
The truth was, I didn't give myself permission or allow myself to dream that big. But that one question changed everything for me.
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After thinking about buying my home with cash, I felt an instant feeling of peace. I no longer felt rushed or stressed. I wasn't overwhelmed or up late at night fighting other possibilities. I could leave my full-time job, give 100 % of my heart to my business and my passion, and save while I stayed in my apartment with my son.
Yes, I wouldn't have the house I wanted as quickly as I thought, but over the years, I learned that patience gives you the best rewards. Instead of having the mindset of “I want it right now,” I knew that being patient and waiting to buy my home, and doing it without going into debt could open some amazing future opportunities for me.
The fear of having such a huge debt load on my back as I grew my business would no longer be there, and I had a real opportunity to focus on other goals, like retiring early. Not having a mortgage, which, for some, is their most significant monthly expense, gave me a new sense of motivation.
I woke up the next morning after making my decision to buy my home with cash feeling hopeful, happy, and confident. Peace of mind is something you will never be able to put a value on.
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BREAKING DOWN THE NUMBERS
In November 2018, I revealed to the world my home-buying plan on my Instagram. The number one question I received was, “How can you be okay with throwing money at rent for something that will never be yours?” or “You are spending so much more by renting.”
Even though in my heart, I knew I was making the right decision, I still did my research on the numbers. Buying a home does not just mean having a mortgage payment. There are a lot of other costs and expenses when purchasing a home. I currently pay $850/month to rent my apartment.
I sat down with Spokane Teacher's Credit Union to talk about what my situation would have looked like if I decided to go with financing. For this example, we used a property here in Spokane, WA, that was similar to something that I wanted in terms of property.
Let's assume that:
- $400,000 purchase price
- $80,000 (20% down payment)
- $320,000 base loan amount
- 3.750% interest rate
- 30 year term
If you look at my rent payment versus a mortgage payment, using the information above, my monthly mortgage payment would be $1,981.97. That's $1,131.97 more than my rent payment. That doesn't include PMI (Private Mortgage Insurance) if you didn't have enough to put 20% down for a payment. If that were the case, your mortgage payment every month would jump to $2,424.51.
Let's not forget the many other expenses that come with buying a home.
- Expected closing costs would be $10,346, which includes origination charges, appraisal fees, title insurance fees, and the initial escrow charges for homeowners insurance and property taxes.
Those are just some of the upfront costs of buying a home. Let's talk about the increased or recurring charges once you start living in the home.
- Currently, my apartment is about 1200 sq. ft. I pay an average of $80/mo for utilities, which includes water and electricity. The house I buy would be significantly bigger, which means my utility bill would increase.
- I also asked Spokane Teacher's Credit Union what the expected home maintenance cost is. They estimated that the average homeowner would spend between $2,000 to $3,500 annually depending upon the age and size of the home.
- Property insurance would be a new recurring expense, which is estimated to be $2,500 every six months with homeowners insurance expected to be at $1,000 every twelve months.
If I decided to buy my house using financing, instead of using all cash, I had a goal to pay it off in three to five years (the same amount of time I was giving myself to reach my house savings goal).
During the time I would be living in the home, with an increased mortgage payment, recurring property and homeowners insurance, increased utility costs, and regular maintenance expenses, I would also be paying roughly $32.88 every day towards interest. That's using the above example values.
Of course, interest charges would decrease as I made larger payments, but assuming I paid the house off in five years, I would throw away $28,000 towards interest during that time.
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I could write an entire article about all of the new expenses that I could possibly have when living in a home versus renting my apartment. Some of them include:
- Lawn and yard care
- Regular maintenance
- Cleaning (your time and energy are worth something!)
- Appliances and appearance
Your monthly rent payment is exactly that, a single monthly number that replaces all of the traditional expenses of property ownership. There is no additional calculation required.
The cost of homeownership has many variables, and timing plays a role. The length of time you plan to live in the home is also a factor. One of the most significant benefits many people believe I am giving up is the expected growth in property value. By staying in my apartment, I am throwing away money for something that will never be worth more than it is now. But here is the truth, growth in property value and equity is not a given. It is not a guarantee. The best and the most you should ever expect from any real estate is to simply keep up with inflation.
For my decision, I didn't take into account guaranteed growth in any property. It's not something you can count on, and even if you count on your home increasing in value by the inflation rate, that means your maintenance, insurance, and other expenses must also increase. They essentially cancel each other out.
WHY I DECIDED TO BUY MY FIRST HOUSE WITH CASH
Making my decision to buy my dream home with cash was not a purely financial determination. In my mind, it would be more expensive to buy versus rent for my unique situation at this specific time. After running the numbers, I followed my heart.
In the end, it came down to peace of mind. Even if people don't understand your journey, your journey isn't for them. It's for you. You have to live with the financial decisions you make, and at the end of the day, you need to feel confident in those decisions. Buying a home with cash may not be the best decision for everyone, but I know it was the best decision for me.
I plan to save $400,000 for my dream home, and I plan to reach m goal by the end of 2022. You can follow my entire financial and house savings journey on my Instagram.
- Resource: Use Gabi to shop for homeowners insurance.