How to Buy Your First Home Without a Mortgage
Coming of age during the Great Recession has given a lot of first-time buyers a fear of taking on any necessary debt. Add to the fact that most already owe tens of thousands of dollars in student loan debt and it's no wonder people are looking for a way to own a home debt-free. If you're thinking about going that route, it's definitely possible. But first you need to consider the pros and cons:
- You can invest your monthly mortgage payment somewhere else
- You have better bargaining ability if you pay cash
- You save on closing costs
- You can live debt-free
- You run the risk of stretching yourself too much financially
- You'll miss out on tax deductions
- It may be harder to get a HELOC for any initial home improvement projects
Does the pro list outweigh the cons in your book? Well, how do you actually get there?
Build your own home
Building your own home (literally) isn't an option for everyone. But if you have the skills, the tools, and the time, building your own home can be a great investment. The other great benefit to this option is you can pay as you go. If you went the traditional route to having a home built, you can bet your contractors aren't going to stop and start work whenever you have enough money to pay them. But if you're doing it yourself, you're free to pause the project while your save some money for the wood floors you want or while you wait for the price of granite to come down so you can start on your countertops.
Buy a fixer upper
Buying a fixer-upper is going to be much less expensive than it buying something move-in ready. Much like building your own home, this is only a good route if you have the tools and the skills to complete the project.
Save for a home
On its face it doesn't sound as impressive as building your own house or breathing new life into a home that's falling apart. But saving to pay for a home in cash is a feat and if you go this route you should definitely be proud. You'll need to take a close look at your budget and see where you might be able to cut out some costs. There are always alternatives. Love clothes? Try a subscription service for used items, like Thredup. Love great food? Experiment with cooking it yourself at home. You can even host dinner parties and split the cost of the meals with your guests.
If you have a partner you plan on buying the house with, you have even more options. Remember when you managed rent, utilities, food, and fun all on your own salary? But now that you're sharing costs it doesn't seem like you have that much more wiggle room. Trust us. It's there. Sit down together and see what your essential bills are. Once you have that squared away you'll have a chunk of money that's more flexible. Decide what else is important to do with that money and save the rest. With any luck, you'll be able to live off a single income for a few years and save the other for your future home.
Use the domino effect
Start with a small home that you can feasibly pay cash for. That might be a small home outside of town, or it might be a tiny home.
We talk a lot about having a long-term plan for your home and making sure you buy something that will still work if you decide to grow your family five years from now. Forget everything we said.
Well, okay, not everything.
If you want to buy a home without taking out a mortgage, you still need to have a plan for your house. The only difference is your plan might be to move if you ever need a bigger house, even if that's only 5 years from now. People who go this route tend to buy a very small home in an inexpensive neighborhood. Often they'll do research and try to predict which areas are going to get more popular in the next few years, which would make their home more valuable. Even if the home doesn't grow in value, you're still essentially living in your savings account.
Let's say you saved for a few years and bought a home--in cash--for $80,000. Five years down the road, you're married and expecting your first child and now your home is just too small for your family. Over the past five years you've been putting all the money you would have paid in rent into a savings account. If you saved $600 a month for 5 years, you now have $36,000 saved. Add in your $80,000 and now you have a $116,000 cash budget for a new home.
That number can skyrocket if your home has grown in value or if you went the DIY route on your home and put mostly sweat equity into it.
Buying a home without a mortgage takes hard work and a lot of planning, but at the end of the day, it might be worth it to know you're living debt-free.