The Fairly Complete Guide to Buying a Home
Mortgage? Down payment? Property taxes? Huh?
I’m a financial advisor. I work with millennials and Gen-xers to help them buy their first home. Buying a house isn’t rocket science, but there are lots of fancy terms that make it feel super complicated. If you learn these fancy terms and how the process works, it makes home buying much more accessible. I’ll be teaching you the terms and breaking down the process step by step in this article.
Down Payments
You see a house you like on Redfin and it costs $1,000,000.
You tell the seller Batman that you want to buy it.
Batman says, ‘Let’s do it. Just give me 20% today and the house is yours’. This 20% is called a DOWN PAYMENT.
20% of $1,000,000 is $200,000. You happen to have $200,000 in your savings account. So you give it to Batman.
You’re still short $800,00. So how are you going to pay Batman the rest of his money?
Mortgages
Just then, a bank shows up…
Bank: Hey focker. I’ll loan you $800,000. You can give it to Batman to buy his house.
You: Thanks dude.
Bank: No probs. I just need you to pay me back the $800,000 over the next 30 years. I’m going to charge a little bit of interest. Around 4%. I’m gonna call this little arrangement of ours a MORTGAGE.
You: Sounds good to me. Hey, quick question…what happens if I’m unable to pay you back?
Bank: If you do not make the mortgage payments, I will take the house from you. The house will officially belong to me and you have to sleep in your Prius.
You: Damn dude. Feels a bit harsh.
Bank: Tough sh*t. I’m the only game in town.
You: OK fine. Give me $800,000 and I promise to pay you back.
Bank: Here’s your $800,000. Starting this month, you’ll have to pay me $3,819/mo for the next 30 years.
You: Deal.
Property Taxes
Batman got all his money and you now own a house. You paid $200,000 out of pocket for the down payment and you borrowed the other $800,000 (the mortgage) which you’re slowly paying back to the bank.
Now the county shows up…
The County: Hey dude. You need to pay us property taxes.
You: Don’t I know you? Aren’t you that inefficient bureaucracy staffed by morons?
The County: Yup! That’s us. We’re gonna need lots of money from you. This will help pay for our mediocre public schools that won’t really prepare your kids for the future.
You: How much do I have to pay you?
The County: It depends on what county you live in. Most counties charge around 1% of the home’s value per year. In the Bay Area it’s closer to 1.5%.
You: 1% of $1,000,000 is $10,000 per year!?
The County: Bingo. That’ll be around $833/mo.
Home Maintenance
There’s one last big expense you’re going to have to pay. Home maintenance. Homes are expensive to take care of. Pipes burst, roofs wear out, and water heaters explode. It’ll cost approximately 1% of a home’s value per year to maintain. For a $1,000,000 home you’ll be paying about $10,000/yr for maintenance.
So, if you buy a $1,000,000 home, after you pay $200,000 toward the down payment you’ll be paying the following amount every month:
Mortgage……………$3,819
Property taxes…………$833
Maintenance…………. $833
Total………….……..$5,485
If a down payment, mortgage, property taxes and maintenance costs haven’t scared you off and you still want to buy a home, here are the nuts and bolts of what that will actually look like.
1. Save up hella money for a down payment. If you plan on buying a $500,000 home, you’ll need to have $100,000 saved up. If you plan on buying a $1,000,000 home, you’ll need $200,000 saved up.
2. Hop on Yelp and type in mortgage lender. A mortgage lender helps you find a bank that will loan you money to buy a home. All mortgage lenders will offer you very similar rates. Mortgage lenders differentiate themselves through customer service. So just hire the one with the best Yelp reviews.
3. The mortgage lender is going to ask you for some financial statements to figure out how much money you make and how good your credit is. They are then going to pre-approve you for a certain loan amount. e.g. $500,000. You then turn to your friends and say, ‘I’m pre-approved for a $500,000 mortgage.’
4. Hire a real estate agent. They’ll help you find a home you like and give you guidance on how much to offer the seller. When you buy a home, the real estate agent is free for you. The seller of the house has to pay for your real estate agent. Pretty good deal for you.
5. Hop on Redfin/Zillow and look for a home you like.
6. When you find a home you like, tell your agent you want to make an offer. The agent will recommend what to offer. You’ll make an offer.
7. You’ll get outbid by techies. They will offer more money than you and you don’t get the house. You’ll be sad.
8. A couple weeks later, you’ll find a new house you like. You repeat the steps again, asking your real estate agent to help you make an offer. This time you are the highest bidder. The seller accepts your offer. The house is yours!
9. You pay your 20% down payment and fill out mountains of paperwork. You’ll be signing around a dozen Docusign agreements and you’ll be too lazy to read any of them.
10. About a month after your offer is accepted, you will move into the house.
11. You discover the house is haunted. But the ghost is into the same weird porn that you’re into. So it’s all good.
Buying a home is an epic pain in the ass. But, if you break the process down into smaller steps it’s quite doable. Really dumb people buy homes all the time. If they can do it, so can you.
