For most people, buying their dream home is an unfulfilled dream. There is always something that comes up that makes it difficult to both save enough money to pay the initial down payment on their dream home and to earn enough to afford the payments to stay in it. And because of these two harsh realities people may spend too much time watching HGTV or scrolling through redfin and Zillow looking at homes they wish they could have. Instead of spending time thinking about your dream home, whether your in your 20s, 30s or 40s; this article will help guide you through actions you can start taking now to get you closer to moving into the home you really desire.
Create a vision plan
To best help guide your goals, you need to proceed with a plan in your hands and begin with the end in mind. This means to make a mental exercise of envisioning you finding your dream home, making the offer, closing on the home, and finally getting the keys and moving in.
You can also vision the following things to help provide you motivation:
- How does it feel waking up in your bedroom and looking out at your dream backyard. Maybe a sunrise over a pool or in a 30th floor condo overlooking your favorite city.
- Having your family over for holidays and the reactions they have to your place and the comforting atmosphere
- Seeing your kids grow up and achieve their own milestones
- Having friends over for game nights or pool parties
- Cozying up on the couch in your bonus room or theatre with your significant other
- Completing great works in your personal office with corner windows
Now with these mental pictures think backwards to what did you do to finally get here. What were the sacrifices you made to pay down any of your existing debts and avoid new debt? How did you invest in yourself to grow your skills and increase your income through raises, career moves, and promotions? How did you adjust your habits to become a more effective person and move away from your current situation? How long did this all take you?
Go ahead and take the time to answer these questions on paper and then use those ideas to formulate the specific and realistic goals that will help you grow personally, improve your career, and allow you to move into your dream home.
Lastly start envisioning what is your dream home and what is the costs of it? In your plan you should also include the facts that a bigger house will come with bigger maintenance costs and take more time to maintain. For example, extra cubic feet will require more heating costs; a pool will require extra water costs to refill your pool as the existing water evaporates as well as costs for cleaning chemicals and time to clean it.
Consider the value of your present home
As you start working on paying down current debts and increasing your households income, remember that the equity and value of your house typically increases year over year. Because of the way banks assign interest on your homes mortgage through amortization schedules the longer you have your home the more money that goes directly into your homes equity. In simpler terms equity is money that you will get back when you sell your house, that you will be able to use towards the purchase of your new home.
As mentioned in the first sentence of this section home prices also typically go up every year at a compounding rate of 3% per year. Consider the following table for a $150,000 house that you will have for ten years.
| Years | Home Value | Price Increase |
|---|---|---|
| 1 | $150,000 | 0 |
| 2 | $154,500 | $4,500 |
| 3 | $159,135 | $9,135 |
| 4 | $163,909 | $13,909 |
| 5 | $168,826 | $18,826 |
| 6 | $173,891 | $23,891 |
| 7 | $179,107 | $29,107 |
| 8 | $184,481 | $34,481 |
| 9 | $190,015 | $40,015 |
| 10 | $195,715 | $45,715 |
Math alert
This shows that for a $150,000 home after 10 years you will have an extra $45,715 that you can use toward a down payment on your new house. If you add that onto the $15,000 down payment you likely originally paid and an estimated $50,000 in equity you have paid on your house, that will allow you to put a down payment of ~$110,000 on your next house. If you also find a way to save $250 a month from year 1 towards a new home you would then have an extra $30,000 for your next home. If you save that 250$ in a mutual fund that averages 5% growth per year you would have an extra $39,620 or $79,240 if you saved $500 a month.
If we assume you saved $500 a month in a mutual fund for 10 years and add that onto your home’s equity we now have around $190,000 to put down on your next home. This would be greater than 20% towards a $900,000 dream home. After applying your down payment you would have to get a $710,000 loan and be able to afford a $3,162 a month mortgage. Using the rule of 3, If you and your spouse are making a combined income of $236,000 this would be considered affordable.
If that monthly payment seems really high you could look at a house twice as much as your current one is after that ten years. This would come to $400,000. You would then need a loan for $210,000 and have an estimated payment of $900 at current interest rates of 3.125% for someone with a credit score of 720. Your payment would also add home insurance and property tax but this is probably not much higher than your current house. Assuming you are also getting raises and promotions in this same 10 years this should be very affordable for you.
In the exercise above you can see it’s not that unreasonable to double or triple the quality of house you are living in after 10 years of paying on your current home by saving aggressively and growing your career skills and earning potential.
Advice for people that don’t own a home to be able to leverage equity and appreciation
If you are too young to have your own home or prefer the freedom of living in an apartment here are some tips to allow you to save just as much in ten years to have your first home be your dream home.
- Create living arrangements that allow you to save as much as you can in a mutual fund. You can do this either by staying with family for cheap or living with multiple roommates.
- If you do live by yourself, live below your means. Eat cheap, avoid buying a new car you don’t need, buy used or budget furniture.
- If you don’t need an apartment with a pool and a gym, don’t live in one since those amenities are included in the price of your place.
- Since you’re not paying building insurance, property taxes, or maintenance use that money and put in extra into a mutual fund.
Now that you know the ways to save extra on your living arrangement, if we are saving $1,000 a month for 10 years in a mutual fund that has an average return rate of 5% compounded over year you will have $158,000 saved. Saving $1,500 a month would be $198,000 after 10 years which would be even more than the above example.
Be financially disciplined to make the down payment on your dream home
Now to be able to save that $500 to $1500 a month in a 5% compounding mutual fund requires extreme Financial Discipline. This is the cornerstone to make your dream possible. For making the down payment for your dream house, considering following some or all of the down payment savings tips:
- reduce all high interest debt and avoid any new debt on credit cards
- transfer a fixed amount every month into a special investment account
- sacrifice. Consider skipping a long vacation for a year, not paying for premium channels, buying cheaper clothes, etc.
- lower your expenses and be frugal.
- don’t be provoked to spend. For example, you do not need to buy a Mercedes or an expensive new car after seeing your neighbor’s new car.
- determine if it is feasible to borrow from your retirement account
- learn negotiation techniques to get a better deal on your dream home
Stick to your budget
After stressing the importance of saving, it is the time to work on your monthly budget. List out your monthly expenses such as groceries, utility bills, dining out, entertainment and shopping. Categories your overall expenses and determine where you can afford to cut back such as eliminating subscription services and packing lunches for work instead of eating out.
When you get a budget you are comfortable with and have been following for some time be sure you avoid lifestyle inflation after getting a significant promotion. It’s ok to reward yourself and increase your budget modestly but remember your vision plan and those images you had of what it’s like living in your dream home sooner.
Invest in yourself
Apart from doing the saving for your dream house, the second critical area you have complete control over that will allow you to get your dream house sooner is to continually work on personal development. Growing your hard and soft skills with inevitable increase your salary overtime and how much you can save and afford for your new home. Look into sites like coursera, masterclass, and teachable to learn additional skills related to your career. Or even enroll in an online college to get an MBA degree. The extra 2-3 years in education could promptly double or triple your salary after finishing the degree if you switch into a high demand career like tech management!
Let your dream motivate you
Motivation and courage are two important things that you need to follow. You can imagine yourself living in your dream home and it will change your present lifestyle. This particular feeling of happiness can give you the courage to take risks and continuously motivate you towards your goal. So, you should not stop dreaming. Your dream will be your power and your source of increasing confidence. Don’t let anything get in your way and keep pushing yourself towards that alluring lifestyle you deserve to keep improving the quality of life for you, your family, and your friends.
Wrapping up
Everyone’s idea of a dream home is different. Figure out what your dream home is to you and how important it is for you to have. If you really want a house that is twice as big, or has the beautiful retreat like master en-suite and walk in closet then ask yourself the vision plan questions and turn those into goals. Start saving and growing yourself and meeting your goals that will help you achieve your dreams today. With a good savings and personal growth plan that you stick to after ten years you can definitely have a house of at least three times the value of your current home!
Ten years may sound like a lot but in terms of a human lifespan this is just another step up. It also allows you to really take advantage of compound interest for your homes appreciation, your homes equity from amortization, and the growths of your down payment mutual fund. Don’t get too impatient while working on your plan and buy an expensive car after your first promotion or step up into an only slightly better home that isn’t your dream! Financial discipline, self investment, and motivation will be your golden ticket.