[Editor's note: This guest post by Sophia Bera originally appeared on LearnVest, a site dedicated to helping people take control of their finances. Bera, a certified financial planner, wrote it for LearnVest's series of provocative personal perspectives on money.]
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I've been told my whole life that I'm so young. I skipped third grade, and I'm an only child, so I'm used to doing things before my time. When I bought a house at the age of 21, everyone was shocked–but I'd been planning it for a few years.
Even from a young age, I've tried to be thoughtful about money.
Before I had any idea what a certified financial planner was, I read "Smart Women Finish Rich" by David Bach. I was a theater major in college, and I was determined not to become a starving artist. So I started my Roth IRA at the age of 18, convinced that I needed to buy a house when I graduated from college.
The problem? While I was in college, I kept watching real estate prices go up, up and up.
My plan was to buy a one-bedroom condo, but my dad convinced me that I should at least have a yard and a garage. I ended up putting in an offer on a 1-bedroom, 1-bath home with a big garage. I had lovely gardens. A fenced-in backyard. And the basement was partially finished, so I was able to turn that into a second bedroom. I often joked that I had the smallest house on the block, with the biggest garage.
What It Was Worth Then … and What It's Worth Now
I bought my house in 2005 for $189,000. In retrospect, I shouldn't have taken out a mortgage that big. I was only making $32,000 a year, so I could only afford half of that! My then-boyfriend-now-husband was living with me, so we made it work.
It seemed like such a good idea at the time, but then the housing market crashed and things started to go down, down, down. The part of the city where I was living was nice, but as the economy started to tank, crime went up. My neighbor got jumped, and another one had his house broken into. I'm a city girl who never thought I'd want to move to the suburbs, but even I was ready to call it quits.
According to Zillow.com, at the height of the real estate market, my house was valued at $239,000; about a year ago, it had dipped to around $130,000.
Trying to Get Out
We were underwater on our home. Although we were willing to take a loss of up to $30,000, we just didn't like the thought of it. After stressing over what to do, we heard that a friend of a friend needed a dog-friendly place to rent.
The stars had aligned.
We rented our house for roughly our monthly mortgage payment and our tenant signed a two-year lease. We agreed to pay the water/trash bill, so we are out about $100 a month. But that still feels a lot better than losing thousands at one time!
In the meantime, we moved in with one of my husband's friends for a year, renting the upstairs of their big, beautiful house in the suburbs. A few months ago, we moved in with my in-laws; his mom was retiring, so paying rent would help them out financially, too. We are actually very happy living with my in-laws, which surprises a lot of people. Living with family isn't a big deal for us—it's more important to keep our fixed costs low and save for retirement and another eventual down payment.
What I Learned From All of This
At 26, I cemented my love of finance by becoming a certified financial planner (CFP®). It should go without saying that making a career out of advising people on their personal finances has given me a unique perspective on what I could have done better at the tender age of 21.
Here are some words of wisdom that I pass onto my clients now:
Put down 20%, but don't wreck your emergency fund. This way, you avoid paying PMI (private mortgage insurance), which can add $50 to $300 a month to your mortgage payment. Also, if the housing market goes down, you already have 20% equity in your home—and a greater chance of being above water. However, do not use all of your emergency savings on a down payment. If anything, I'd rather have a client put 10% down and have a big emergency cushion. The last thing you want is to move in, and then have home repairs set you back.
Buy something that you can afford. Make sure that you can swing your monthly mortgage payments. In most parts of the country, a good rule of thumb is to buy a home that's 2-3x your yearly salary or 3-4x your yearly salary if you're on the East or West Coast.
"Be greedy when others are fearful, and fearful when others are greedy." That wisdom is from Warren Buffett, my hero. If everyone and their mom is buying real estate, you probably shouldn't. It's a sign that there's a bubble.
Don't buy if you aren't absolutely sure that you want to be there long-term. We knew we'd be happy in our home for a few years, but we also thought we'd be able to sell easily. This didn't turn out to be the case. At that stage in our lives, we should have rented, saving money for a 20% down payment on a bigger home that we could be in for the long term.
Here are a few things that I did right:
I did my research and found a good mortgage broker. Adjustable-rate mortgages (ARMs) were popular at the time and a bad mortgage lender almost led me astray … then I found a great mortgage broker who told me about first-time home buyer loans. I was able to get an affordable 30-year fixed rate. They also provided some down payment assistance and helped with closing costs. All first-time home buyer loans are different, so check to see what's available in your area.
I got rid of our PMI. Since I didn't put 20% down, we started off having to pay $72 a month in private mortgage insurance. That's like having an extra utility bill! As soon as we could, we figured out the total we needed to pay to have 20% equity in our home, and then wrote a big check to get rid of the extra payment. It also minimized the spread between what we owned and our home's value.
I didn't buy a condo or a townhouse with an association. I was close to buying a condo with a homeowner's association which, to me, meant lots of rules. I've never been a very good rule follower, so I'm glad I went with the actual house. Plus, I have the freedom to rent it out.
I bought close to college campuses and a bus line. We've decided to keep this property as a long-term real estate investment because the location is desirable, and there are always going to be undergraduate students, professors and grad students who need to rent.
In the end, it all worked out … but I realize how lucky I am to have a great tenant renting my place!
I think that too many people are afraid to buy real estate today. If you have a 20% down payment (don't raid your emergency fund or retirement accounts!), and you're planning to stay put for a while, now is probably the best time to buy. Home prices have dropped significantly, and mortgage rates are rock bottom. In many areas of the country it's actually less expensive to buy now than to rent.
According to Zillow.com, my rental property is currently worth about $155,000, which means that we're no longer underwater on our mortgage. There are a couple of things that are a great relief to me and my husband: The housing market is finally starting to turn around, and we have great friends and family who are there for us when we need them.