Aug 20 2010

A Philosophy on Buying a Home Without Debt

This guest post was provided by Kyle Chezum, a content specialist at Lender411 – a firm that helps homebuyers compare mortgage rates, find local lenders, and locate the best mortgage packages available.

I’m 22 years old – and I’m buying a house. This may come as a surprising feat to some of you. According to a study released by the National Association of Home Builders, the average first-time home buyer is roughly 33 years old. When I buy my house, I will be the exception in that study.

The “Debt-bed”
As part of a company that specializes in matching homebuyers with mortgages, I see deals made around me every day. We’re able to do a stellar job pairing borrowers with lenders but I find myself concernedly hoping that I don’t spend the next 30 to 40 years of my life burdened with a mortgage.

Debt isn’t just a financial impediment – it carries a strong psychological aspect as well. It can brood over you and contribute to your fears of what lies in the future. It can kill passion and excitement.

  • If you’re stuck in debt, you’re stuck in a job – you have to keep making those payments every month.
  • If you’re stuck in a job, you’re most likely stuck wherever you live – you can’t quite and move across the nation, or relocate to Europe, or drop everything to make a wild attempt at becoming a rockstar.
  • If you’re stuck wherever you live, that’s where you’ll wither away. Simple as that.

I know this sounds morbid, but in my opinion, this is what the future looks like under the shadow of debt. “Opinion” is the operative word here. Some people don’t mind debt. Most of the clients we work with each day do not mind it too much, or they wouldn’t be working with us. That’s fine. But I guess I’m kind of a rebel.

A Rigorous Plan
I’m buying a house. But not with a mortgage – not if I can help it. My goal is set on making a 75% down payment on the day that I purchase my home. Sounds impossible?

Here’s how I plan to save for this down payment:

  1. I went to my bank a while back and set up a dedicated savings account. I told myself that as soon as any money entered that account, it was never coming back out. This savings account is my house fund.
  2. I get two paychecks each month. Of those, the first goes immediately into my savings account. The second is used to pay for rent, utilities, and other significant bills.
  3. I start each month with $100 in my checking account – no more than that. I make this $100 last all month. It covers groceries, gas, and other daily expenses.

And that’s it. It works for me. But, everyone has a different situation. I don’t seriously believe that the $100-per-month plan will work for everyone, though if you want to try it, go ahead – I think you’ll be astonished to find what you consider to be necessities.

The following tips are more broadly applicable:

  • Budget. If you don’t have a budget, make one. There are a number of simple tools online that allow you to do this. One of the best is Mint.com. Take a few months and just keep track of your expenses – nothing more. See where your money goes. There are probably a few things you can cut out.
  • Don’t use credit as income. Avoid credit cards, payday advances, auto loans, and any other short-term debt, if you can. It will always cost you more to use a credit card than it will to use cash. Avoid other extraneous debt.
  • Drive a clunker. Forget about buying a brand new car. Get something older, something that runs well but doesn’t have the high price tag associated with that “new car smell”. A mid-90s Toyota sedan, for example, still has tens years of life in it and, depending on the exact car, will only run you a few thousand dollars.
  • Don’t do the “luxury vacation” thing. Please don’t. Don’t go on a cruise or on a week-long adventure in Costa Rica. These kinds of trips are beyond expensive. Go on vacation every year when your home is paid off and you’re living debt free. Skip it for now, and those day will be here that much sooner.
  • Start saving right now. This is the most important part. You’ll never be ready to save money – just do it.

Say It, Do It
Ultimately, your financial goals and life dreams will serve as driving propellants. Again, if you don’t mind debt, that’s fine. In order to be more financially effective in life, some of you will leverage your assets to some extent. I get that.

What bothers me most, though, is the psychological side. I don’t like debt. Plain and simple. Every month, when I deposit that paycheck into my savings, I tell myself, “I’m buying a house”. Because that’s what I’m doing.

I’m buying a house. Right here, right now – bit by bit. It’s a philosophy, in a way. A constant lifestyle. Movie tickets, dinners out and weekends at Disney World fade into the background. These things aren’t important yet. For now, I’ll work on buying that house.

Simon’s Note: Kyle’s plan is one of apparent extremes. I understand the reluctance to take on debt since interest charges are quite scary. He is doing what he feels is the correct path for him. What he can do may seem impossible to replicate but it isn’t to say that it is unachievable. This is one way to approach a goal. To each their own.

(Photo credit: bendeming)

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2 Comments on this post

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  1. LakeDweller said:

    I enjoyed the post. You didn’t mention how long it will take for you to save the 75% down payment. We probably have 5 years of steady home prices in some markets, but the more healthy cites have already started to see price growth. I suspect the rate of price increases will beat the growth of your savings. Therefore you will be forced onto the same treadmill that the rest of us chose.
    Your home should be considered an investment. Get in early and don’t sell in a panic.
    Do spend as much time as necessary to find the right neighbourhood and improve your credit score so your interest rate is lower than the long term rate of return of the stock market.
    You can’t beat ~4% – 30 year rates.
    As a rental property owner I do like to hear encouragement for more people to rent. Thanks for the plug!
    That gives me an idea. Why don’t you buy a rental property now and when the equity in the property (and your savings) equal 75% buy your own home.

    August 21st, 2010 at 4:24 pm
  2. Anonymous said:

    When you take inflation of the dollar into account the interest on a mortage probably drops by 1-2%. Also the prices of houses could inflate even more than the dollar. For instance, my parents bought a home in 1997 for $150k over 10 years later it is worth $350k +. Additionally there are tax incentives that may make buying a house with credit more financially reasonable.

    February 17th, 2011 at 1:18 am

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