A friend debating whether to make the leap into home ownership recently asked me if I was frightened when my husband and I bought our house. No, I answered honestly. But that’s only because I was blind to the potential financial pitfalls.
As I look back at our decision-making eight years ago, I realize we made some money moves that could have backfired on us. But we were relatively young – homeowners at 23 and 25 – living in a world yet to enter the Great Recession.
For example, we put 10 percent down, financed 80 percent over 30 years, and took out an additional short-term loan for the other 10 percent to avoid paying PMI. (That’s private mortgage insurance, required when you put down less than 20 percent, and it protects the bank, not you.) As I understand it, lenders won’t even let you do that anymore.
I made the decision to go with the adjustable rate on the short-term loan, thinking it would never get up to the higher fixed rate. I was wrong. It increased more than 3 percentage points in a matter of months.
About that time, my husband received a credit card offer featuring zero percent on balance transfers. We read the fine print, and it seemed like a great idea to transfer the balance of the smaller loan to the card. Even our mortgage agent agreed.
We paid that card off quickly, and didn’t incur another dime of interest.
Zero-percent deals also allowed us to furnish and carpet our new home. We followed the rules, paid extra each month, and avoided the “gotcha” clauses those sorts of deals often hide in fine print.
We were proud of our financial prowess. But in hindsight, those moves were a lot riskier than I realized. What if one of us had lost our job? Or been injured? Or worse?
The 10 percent down payment had nearly wiped out our savings. Would we have been able to make the credit card payments on one salary? Or would have we fallen into their traps, paying 20-plus percent interest all the way back to the beginning of the contract?
Some financial risks are worth taking, but never out of naiveté.
Simply put, we should have had a bigger cushion before we bought, ideally a 20-percent down payment plus three to six months of expenses set aside for an emergency. We should have had additional cash on hand to pay for the furniture and carpet.
Thankfully, none of our decisions burned us. And we were smart about some things. We bought a house we could afford – much less than the bank was willing to give us – and one we planned to live in for a while. We made a double first payment, which can knock months off the back end of a mortgage.
We’ve since refinanced the home to a crazy low 3.375 percent for 15 years, and are making additional principal payments (only after funding our retirement accounts and putting a little away in college savings for the kids).
Our goal is to have the house paid off when I’m 40 and hopefully much wiser than the 23-year-old me.
Sherri Richards is a thrifty mom of two and employee of The Forum.