Wealth Beyond Riches: Building Prosperity With Purpose, Values, and Impact

The First-Time Homebuyer: How to Choose the Right Home at the Right Time (Ep.19)

September 11, 2024 • Abbey Henderson, CFP®

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There are too many different societal and economic pressures that come up when you think about home ownership. You could see it as a necessary life investment, you may be trying to start a family, or you could have reached the point in life where you are ready to put roots down in one location to be closer to the homes of friends and family.

Are you thinking about buying your first home? In this episode, host Abbey Henderson, CFP® , CEO Wealth Advisor & Coach, dives into the emotional and financial intricacies of purchasing your first home, as well as how to avoid making quick decisions that are tied to emotions.

Abbey also discusses the importance of aligning your purchasing decisions with your personal values and long-term financial goals, making a point to unpack and discuss the hidden costs of homeownership like property taxes and maintenance. 

This episode is a must-listen for first-time homebuyers and anyone curious about the deeper financial implications of owning a home.

Key discussions: 

  • Understanding the emotional and financial complexities of buying your first home and determining if buying is the right move at the current time
  • Learning about the hidden costs beyond the mortgage payment, such as taxes and maintenance
  • Discovering why it’s essential to align your home-buying decision with your personal values and long-term life goals such as starting a family or leaving money for your children
  • Tips on managing your finances effectively when considering homeownership, including the significance of having a substantial emergency fund
  • And more!


Connect with Abbey Henderson: 

EVS_EP19


Wendy (00:01)

Hello and welcome to the Wealth Beyond Riches podcast with your host, Abby Henderson, where we talk about enriching your life in every way. I'm Wendy McConnell. Hey, Abby, how are you? I'm good, I'm good, I'm excited. We're talking about buying your first home today, right?


Abbey Henderson (00:13)

I'm good, how are you?


We are because it's a very emotional decision, normally, and it's full of all sorts of strongly, widely held beliefs that may or may not be true.


Wendy (00:35)

Yeah, you know, and there's such an importance put on being a homeowner. I didn't get married until a little bit later in life. So when I was in my late thirties, I kind of started to feel like, I got to make the backup plan in case it doesn't happen. So I bought a condo and everybody tried to talk me out of it. They're like, don't do it. Don't do it. And it ended up being a horrible mistake, but


Abbey Henderson (00:53)

Mm -hmm.


Wendy (00:59)

It made me feel confident and more secure to just have something that I could own one day.


Abbey Henderson (01:06)

Yep, there's no question that there is a very legitimate belief and feeling that homeownership gives you that there is that sense of security.


Wendy (01:20)

Right. So is that the responsible thing to do the fiscally responsible thing to do? Like everybody always hears you're just throwing rent away.


Abbey Henderson (01:31)

There's, so the question, the answer to your question, is it fiscally responsible is maybe. Yeah, well, I mean, in an ideal world where you have your crystal ball and you are making that decision for the right reasons, then yes, it is fiscally responsible. But people do this for, without thinking the whole thing through.


Wendy (01:38)

Okay, that's not what I thought you would say.


Abbey Henderson (01:59)

So, like you said, it's this strongly held belief that it's the responsible thing to do, that you're just throwing money away on rent, that the only way to acquire wealth is by buying real estate. There's my friends are buying houses, I should buy one, or so many things. And I think...


that the most important thing to do is to take a step back. Because if you're doing things because you think you should, or because you're sort of doing the keeping up with the Joneses, that's the time to get curious about why you're really doing


Wendy (02:46)

Okay.


Abbey Henderson (02:46)

So as with many topics we talk about, step one is figuring out, like, does this decision align with your values? And if you haven't figured out what those are yet, that's probably the time to start doing that. And we'll put some links to other episodes where we've talked more about how to do that. But, you know, it's useful to start with your why.


So what is it about owning a home that serves the things that you value? And it can be things like you and I love our dogs. And sometimes it's really hard to rent if you have dogs. that's a reason. So for example, when I got divorced, I didn't jointly own a home at that time.


getting divorced, we were going to sell the house, what probably would have been, if I were taking a step back, more fiscally responsible, would have been to probably rent for a year. Sort of see what happens, let the dust settle. But I couldn't, because I had a dog. And not just any dog, at the time I had a German Shepherd. So you don't just go rent any place with a big German Shepherd, usually. Yeah.


Wendy (04:05)

Okay.


Yeah, yeah, that can be an issue.


Abbey Henderson (04:15)

So, you there are reasons why owning versus, you know, renting really can align with things that are very important to you. So it could be that. I mean, I've had people who get so much peace and joy from something like a garden. And if you rent, you can't always have a garden. You know, if security is a high value for you, that can absolutely be a reason, which you alluded to before.


especially if you have kids. That's not my situation, other than the for babies, but if you have kids, there's an aspect of providing security for them. So there's all sorts of reasons why you can sort of say, these are my values and this is why ownership aligns better than rent.


Wendy (05:08)

So for the most part, we always, and not everybody, obviously some people do sugar ones, but we have these 30 year mortgages. So is there a certain age that we should be purchasing a house based on the fact that it's going to take 30 years if we do everything on the timeline that we start with?


Abbey Henderson (05:25)

So my argument would be no. because believe it or not, I often see clients who are just trying so hard to make sure their mortgage is paid off, you know, on their retirement date. And that's actually not the best option for them. And the reason being is it's very easy to become, particularly in New England,


very house rich and cash poor. And so that was especially an issue when, sadly we aren't in a world of 2 .9 % interest rates, which was not too, too long ago that that was true. But I've seen clients rush to pay off a mortgage at a very low interest rate. They weren't saving outside of that.


you know, those extra payments to the mortgage. And so now they might be looking at taking out a home equity line at 8 % to fund expenses. So there's never, in my mind, there's never a set, you need to have a mortgage paid off by a certain date. That may be true, it may be to your benefit, and it may not.


Wendy (06:31)

yeah.


See, the only thing that really concerns me, and I have one of those low rates that you were talking about, not as low as you mentioned, but pretty low. I know that I need to be aware of that and take advantage of that fact, but the payment is very high. That's what I worry about. That's why it makes sense to me to try and pay it off before retirement, just because I don't know if have that kind of pay, where am I getting that kind of money?


Abbey Henderson (07:06)

Yeah.


So yes, and I think that that's a sort of a good data point that there's no one size fits all. And so when you read articles in the news, people love to throw out these rules of thumb and kind of like the you should always buy not rent. It's very situationally specific. so I think that, honestly that's where a


financial advisor comes in. They can sort of look at your specific situation, where you are, how much you can save, what your trajectory is, and then come up with a more sort of custom answer specific to your situation.


Wendy (08:04)

I've often heard, know, for investing purposes, real estate, real estate, real estate. Like, is that true?


Abbey Henderson (08:11)

Can be. It really depends on what you mean by that. And that's something I also hear from younger clients who are looking to buy their first home when I'm asking them, what is your vision? Are you thinking you're going to get married? Are you thinking you're going to want to be someplace with a great school system? How long do you think you'll be in this house? Because...


to buy something, you really need to plan to be there for at least five years. Prior to that, it's not really much better than renting. So you're just, you have all those upfront costs. In the front end of a mortgage, you're paying mostly interest. You're not actually building as much equity as maybe you think you are. you know, it's, you really need to think about how


long that you're going to stay there. And what I hear often to your point is, well, if I don't stay there, I'm just going to keep it and rent. I'm going to rent it. Which sounds great and can be great if it's the right situation. It has to be the right location where you can earn enough rent to cover all your expenses. And then,


Wendy (09:21)

Right.


Abbey Henderson (09:39)

you have to consider do you really want to be a landlord? Do you want to be the person when the toilet's overflowing that they're calling and you're getting up in the middle of the night to go over there? Because every time you outsource that to Roto -Rooter or whatever, it's just eating into your profits. And in that situation, the investment value of your now investment property


is not as great as maybe it could be. Plus, you buy a property and it turns out not to be the right thing, you flip it or you decide to hold it as a rental property, it changes the tax implications of that as well. So now you've got an investment property that's a very different situation when you go to sell it than a primary residence.


Wendy (10:33)

Okay. That nasty capital gains, right?


Abbey Henderson (10:38)

You got it. So, so yes, real estate can be the way to well, but it is not, you know, it is not quite as simple, particularly in the, in the situation where it's your backup plan to hold a property that didn't work out the way you hoped it did.


Wendy (10:56)

Well, what about these people and their, I always laughed at this, but the starter house? I hear that so often. Well, it's a great little starter house. How many houses are you supposed to own?


Abbey Henderson (11:03)

Yeah.


Again, that's the problem. that has happened to a fair number of my clients where they rushed to buy something, often either right before they were married or right after. And it's not long before they're two kids in and they're like, this is not big enough. And right now that's particularly an issue because they are in that situation where they probably did buy at a lower interest rate. And so now...


even with their starter home appreciating, they can't necessarily make the jump into something bigger because of mortgage rates. So they might have been better off saving and waiting and renting for a few years before they could really afford something that was maybe one step up from a starter.


Wendy (11:49)

Hmm.


And this is when your vision is really important. That's when you gotta think about what it is that you're after so that you don't get something that turned out to be a starter home, right?


Abbey Henderson (12:12)

in an ideal world exactly. it's hard because none of us have our crystal ball, but just giving the thought to it as opposed to just defaulting to the, need to own something. Just have some thought. And also, I think if you do have to pivot and maybe it doesn't work out exactly as you had hoped, you can at least look back and say, well, I thought about it all. did the best with the information that I


Wendy (12:41)

Yeah. So we've decided we want to buy, okay? We're going to buy a house. And we know now that we're going to have the initial costs, the moving expenses, all of that stuff. We should plan on living there for at least five years. What else do we have to think about?


Abbey Henderson (12:45)

Yep. Yep.


Yep, yep. So you want to think about those things, then I would say you also want to think about, are you moving to a new area? Would it make sense, even if you know you want to buy something in this area, does it make sense to maybe rent for a year and really get a sense for different neighborhoods?


especially if moving someplace for a new job potentially. Getting a sense for your neighborhoods, getting a sense for your new job. Is it someplace you are going to want to stay? Especially if it's a big move. I was chatting with someone who was thinking about moving here from the West Coast. Boston's very different. And you don't know if you're going to love your job. So don't rush into something just because you think


It's bad to run.


Wendy (13:55)

Yeah, you can see the difference between California and Boston in the Legally Blonde movie.


Abbey Henderson (14:04)

I actually love that movie.


Wendy (14:07)

It's so good! I couldn't come up with the name of it at first. like, Elwood, you know, okay, yeah, yeah, you're legally blind.


Abbey Henderson (14:15)

What?


Wendy (14:19)

But yeah, you're right. If you're going to go somewhere like really far away, I mean, you should at least do like a short term, like to see the area that you want to live in. And like you said, know, hopefully, you know, everything's going well with the job.


Abbey Henderson (14:30)

Right, right. you know, lot, I'm trying to think, I have had some clients in the past where their employer was relocating them, so at least they knew that the job was something that they would like, but the company was paying for a relocation service and they were going to buy. I just think there's so much to be gained by just taking some time to explore.


And the same is true for people buying second homes. Like have a lot of clients who are like, I want to buy a condo in Florida and be a snowbird. Well, go rent for a couple seasons. Try different places in Florida. Like, just, everyone's in such a hurry. Just slow down and explore. Slow down and be curious. Renting for a couple seasons is not going to be the end of the world.


Wendy (15:25)

So I've been paying rent for a while. Am I looking for a house payment that's going to be the same as my rent? Is that something that's realistic or is it usually more or less?


Abbey Henderson (15:40)

So I hear that all the time. Well, just going to, know, my rent is $1 ,000, so I'm just going to pay a mortgage of $1 ,000. And I wish it worked that way. I think we all probably wish it worked that way. Of course, like if you really get down to it, you need to make sure that you're comparing apples to apples. So yes, you have your mortgage payment when you own a house, but then you also have your property taxes and your homeowner's insurance.


Wendy (15:50)

Yes!


Abbey Henderson (16:09)

and your excess liability insurance, and you've also got your maintenance, and or HOA, homeowners association fees, which you probably weren't paying when you were renting. For expenses, I've heard the estimate that one to 2 % of your property value you should assume that you'll be spending on something. So there's that, and then.


If you want to be really financially responsible, look at the longer term projects you're going to have to do, like replacing a roof or painting your house or all those things that were just like, yeah, that's like 10 years from now. Well, yes, it may be 10 years from now. And wouldn't you be happier if you put, you know, whatever it is, $200 a month away towards that roof over the next 10 years and then it's paid for or


Wendy (17:06)

Who's doing that? Who's doing that?


Abbey Henderson (17:07)

Well, that's the one value of a condo association because they're supposed to be doing that for you with your homeowners. But in theory, us homeowners should also be doing the same thing.


Wendy (17:13)

hate.


I know, I know. Yeah, so we often talk about an emergency fund. Does that change when it comes to purchasing a house? The amount that we keep in it?


Abbey Henderson (17:27)

Great, no it's a great question. So assuming your expenses are going up, then yes, your emergency fund would have to change. depending on sort of your living situation, partner situation, job stability and security, you typically need three to six months of your living expenses in an emergency fund. And so yes, as soon as your expenses go up, your emergency fund goes up.


Wendy (17:58)

What about, what about, you know, this, and we haven't heard about this in a while because everything just went through the roof during COVID, but what is, what does it mean when your mortgage goes upside down?


Abbey Henderson (18:13)

So this is, this I see more often with first time home buyers because there's programs out there that allow you to put down very, very small amounts for a down payment. I've even seen some programs that it's almost nothing you have to put down. And that works fine as long as your housing market continues to go up. And it feels that way because that's, you know, what


we've seen for the most part recently, but that definitely does not always happen. I purchased a property in 2010 and that the previous owner had bought it, I think it was in 2005, if I remember correctly, which was more of the top of a cycle because real estate has a cycle.


you know, we forget it, but it has a cycle just like any other asset. And so that person, just because of, you know, circumstances and timing, was forced to sell at a really terrible time. So she actually lost quite a bit of money on that sale. Now, luckily, in that case, she had a fair amount of equity so that


when that sale happened, she was able to pay off the mortgage. So upside down is when you owe more than you get or than it's worth, but she didn't get a whole lot more. So we forget that these things do happen and they have happened in the somewhat recent past. actually that example was another one where


Wendy (19:55)

Yeah.


Abbey Henderson (20:08)

you need to be someplace for five years or more. Because she wasn't and that it was, timing was terrible. So yes, in an ideal world, you have at least a 10 % down payment, but I'm a big fan of 20 % down, which is standard for a standard mortgage.


Wendy (20:16)

Yeah.


Okay, when it comes to your interest rate, should we always be looking for a fixed rate?


Abbey Henderson (20:38)

Mm -hmm.


like fixed rates because it helps us manage cash flow. So I am a big fan of a 30 year fixed mortgage and the thought that if rates come down, and luckily we are in a situation in the relatively near future where I think that's finally going to happen again, plan to refinance. I have seen a lot of people go into riskier,


mortgage products because it, by either paying interest only, which is where, it's exactly what it sounds like, you are literally just paying the interest, you are never paying down any of the principal, an interest only or oftentimes variable products where you have a fixed interest rate for say three years and then the interest rate varies.


Those types of products can get you a lower monthly payment. So I have seen people gravitate towards those because they really want to get into the bigger house. So they really want to get the smallest payment possible. But there's risk. There's risk involved in those because you're either not ever paying down principal or you're risking the rates going up. So I really do like the 30 year fixed.


from a planning perspective. And if you're looking at those other products from a strategic standpoint, that's a little bit of a different story. But if you're looking at those products because you need to get your monthly payment as small as possible, that almost always comes back to bite people.


Wendy (22:33)

Yeah, I was almost wondering what the benefit of a variable rate would be, but I guess you're saying it's a low payment, but it's only for those first three years. Then you don't really know what's going to happen, right? Yeah.


Abbey Henderson (22:44)

Exactly. No, exactly. But you qualify for more because mortgage companies are going to figure out what you qualify for based on the payment relative to your other debts and your income. So you qualify for a bigger mortgage with those.


Wendy (23:04)

Speaking of qualifying, how important is your credit rating when it comes to shopping for a home and a mortgage?


Abbey Henderson (23:13)

It's important. It's going to get you better banks and it's going to get you better rates and it's definitely going to sort of smooth the process of becoming pre -qualified. So I think it's very important. And then the other thing to consider is that


banks are going to figure out what you qualify for based on your income, which can be a surprise to people who perhaps don't, they might have a lot of assets, but they don't necessarily have a lot of income. So sometimes I see that happening with retirees who might have, you know, more than enough money to buy their second home in the bank, but they decide they'd rather take out a mortgage.


and then they don't qualify because all of it, you know, their income is not, it's sort of interest dividends and social security. So that can be really surprising for a certain subset of people.


Wendy (24:19)

Okay, yeah.


Yeah, mean, the bank definitely wants to know that you're getting money on a regular basis.


Abbey Henderson (24:31)

Yes, but you would think that if the bank, one would think that if the bank sees you have enough assets to pay off the mortgage if you had to, why would they care?


Wendy (24:42)

Right. They do. They do. And as a financial advisor, you'll hate this story. When my husband and I were looking for a home, had the one thing that we really had going for us is we have amazing credit. So we were pre -approved for a certain amount. Of course, we fell in love with a house that was more than that amount. So, you know, I did the smart thing and went way over my budget.


Abbey Henderson (24:44)

But they do.


Wendy (25:11)

and they extended that for us.


We got the extra wiggle room, so to speak, because we have a very good history of paying off our debts. But I did tell you, you wouldn't like that story as a financial advisor.


Abbey Henderson (25:19)

Yeah.


So that is the perfect example of yes, credit scores matter. And I don't hate it. It's very common. it's, know, my last and parting tips, which nobody follows, including myself, try to be patient and not emotional and stick to, you know, what is it?


that's most important, what do you value and why are you doing this? Which nobody does, we all fall in love with the house and are like, I want it.


Wendy (26:02)

Yeah.


Right. Right. Especially after you've already looked at 16 and you're like, I'm never going to see, it's going to, many more houses before I find another one that is this darn cute.


Abbey Henderson (26:18)

I know. mean, I probably shouldn't say this story out loud on a podcast, but, well, it's, so we moved from a condo to a house in 2021, and that was sort of the end of COVID in the midst of the, at least in Massachusetts, the crazy, or it was almost the end of the crazy real estate cycle where, you you'd go to an open house and there'd be 40,


Wendy (26:26)

Who are the best ones?


Abbey Henderson (26:46)

40 cars in the driveway and people were writing offers as you walked out the door. So that, I didn't do an inspection on that house. Thank God, knock on wood, it's worked out. But that's an example of I wanted that house. And I mean, that was around the time where you couldn't, nope, nope.


Wendy (27:02)

Okay, yeah.


You couldn't. Yeah, I mean, you could make demands.


Abbey Henderson (27:16)

No demands.


Wendy (27:17)

You're lucky they would even like entertain your offer.


Abbey Henderson (27:22)

That was back when we were all writing letters about how much we loved their house and we see you have dogs and we have dogs too and we picture our dogs running around in the backyard and yeah.


Wendy (27:32)

idea.


I said a picture of me on the kayak with the dog.


Abbey Henderson (27:41)

See?


Wendy (27:44)

We're a lot alike here, aren't we, Abby? But one last thing and then we'll finish up. But I used to watch House Hunters all the time and these people would be like, well, that's one... I've moved on to Love It or Listed or Home Town. But they'd be like, this is $20 ,000 over our budget. And they're like, no. And I'm like, 20? Are you crazy? 20? I wish I had gone just $20 ,000 over my budget.


Abbey Henderson (27:46)

So many similarities.


Used to. You don't still?


I watch them all.


Wendy (28:13)

But yes, so far I've made all the payments, so you know.


Abbey Henderson (28:18)

and you love your house. And how long have you been there?


Wendy (28:20)

Love my house. We have been here now. This is our eighth summer, so.


Abbey Henderson (28:25)

see, you've made it past the five years too.


Wendy (28:28)

Yay! Okay, all right, so we've off on tangent after tangent, so I'll put it on. Yeah, so any last tips then?


Abbey Henderson (28:33)

We really have. It was fun.


Don't be emotional. Try not to be emotional.


Wendy (28:43)

as we tell our emotional stories.


Abbey Henderson (28:46)

Yeah. Yep.


Wendy (28:50)

Try really hard not to be emotional. Use your brain, not your heart.


Abbey Henderson (28:57)

Or at least 50 -50.


Wendy (29:00)

Okay. All right. So Abby, if someone wants to get in touch with you, how do they go about doing that?


Abbey Henderson (29:08)

All the usual places you can email me at abbeyatabberisfinancialgroup .com, our website, abberisfinancialgroup .com, LinkedIn, Facebook, Instagram, Twitter, all the places and all the links will be in the show notes.


Wendy (29:23)

All right, sounds good. Well, thank you and thank you for listening today. Please like, follow and share this podcast with your friends. Until next time, I'm Wendy McConnell.