Dear Friends – Earlier this year, I came across an article in USA today that was written by financial advisor, Jim Wang who has also had articles appear in Business Week, New York Times, and various other media and radio outlets. I felt this article was a quick read, and a great way for a first time home buyer to prepare themselves to enter the housing market and wanted to share it:
USA Today.com article from March 15th, 2017 by Jim Wang: Practice making “Pretend Mortgage payments”
The one thing everyone should do (but no one does) before buying a house
Jim Wang, Credit.com 4:00 p.m. ET March 15, 2017
As I searched for my future home, I played a financial game with myself. Why not pay a “pretend mortgage” before my real one so I had a better idea of what it would feel like?(Photo: Getty Images/iStockphoto)
Sometime in my mid-twenties, I decided I wanted to stay in the Maryland area and buy a home.
I could afford a mortgage around $1,500 per month based on my expenses—mostly student loan payments—and salary. If I found the perfect home, I could stretch to afford around $1,750 per month.
As I searched for my future home, I played a financial game with myself. I’d soon be saddled with a $1,500 mortgage, so why not spend like I had one already? Why not pay a “pretend mortgage” before my real one so I had a better idea of what it would feel like?
When I was looking for a home, I was sharing a two-bedroom apartment with a friend and paying $600 a month, plus utilities. It was a steep jump to go from $600 to $1,500 a month, so playing this game was important.
At the time, I was budgeting using an app, so I knew I could handle the increase.
I could maintain one of my key money ratios, paying less than 30% of my salary to housing. But I still needed to know how it felt. It’s one thing to see it in an app and another to feel it.
How ‘playing house’ worked for me
Every month, I paid my $600 for rent and set aside $900 in savings. As you’d expect, I didn’t just transfer money from one account to the other, because who has $900 sitting around? If I did, I wouldn’t need to play house!
I had to make adjustments. I contacted my human resources representative to reduce my 401K contributions so I’d have more in my paycheck. I had to adjust my other savings goals as well because I wouldn’t be saving as aggressively.
I also started going out to dinner and bars less often. Instead of going out for drinks a few times a week, I limited myself to two nights, on the weekends.
Making those trade-offs became easier — and easier to explain to friends without having to deal with grumbling, because I was making a clear choice. I was cutting some social time because I wanted to buy a house. I wasn’t saving money for the sake of it. I had a very good reason: to buy a house.
The housing search took about 18 months and I played house for only 12 of them, so I had an extra $10,000 or so saved up in my mortgage account. I took that money and put it toward the down payment.
The house ended up having a mortgage that was a little less than $1,500, and after living with the mortgage payment for a year and a half, I had no trouble adjusting to it.
If you’re thinking about buying a home or making a similar large purchase, consider playing house first.
This article originally appeared on Credit.com.
Jim Wang is the founder of WalletHacks.com, a personal finance blog where he shares unconventional strategies and tactics to get ahead financially and in life. He has appeared in The New York Times, The Motley Fool, Business Week, and other media and radio outlets. See more at www.wallethacks.com and follow Jim on Facebook or Twitter. More by Jim Wang