Don't Let Your House Hold You Hostage
For those dedicated readers of our column, we'd like to first say thank you. We deeply appreciate all of your support. Thanks to folks like you, our efforts to help improve financial literacy continue to gain traction. We are thrilled to hear from both women and men that reading our book, "On My Own Two Feet," has literally changed their financial lives.
Interestingly, the one area of our book that has a few people up in arms is our recommendations on housing (Chapter 11). When our book was first released, many people said our advice was way too conservative. However, with the unfortunate wave of foreclosures sweeping the nation, people are rethinking their notion of real estate as a "can't lose" proposition. Entirely too many hardworking people face housing induced financial stress - and goodness knows life has enough speed bumps.
As we mentioned in previous columns, the first step to financial success is saving. A lot of us have a tough time finding money to save. Did you know that one of the biggest culprits that can blow a budget is buying more home than you can afford? The good news is that we have a few rules of thumb to consider when you buy your home. First, ask yourself, how long will you live in your home? If the answer is less than five years,
we strongly urge you to consider renting. Why? Well, up until a couple years ago, it seemed like housing prices could go nowhere but up. However, that's not the case. The last thing you want to do is buy a home today and be forced to sell in a couple years (as some military families are forced to do) at a lower price. This puts you on the hook for the price difference of your home and the cost of buying and selling your house. Those closing costs and real estate agent fees are not chump change, either. They can reach almost 10 percent of your purchase price.
Once you know that you'll stay put for five or more years, our recommendation is to keep your all-in housing expenses (mortgage, taxes insurance, maintenance/upkeep) to 25 percent or less of your gross or before-tax income. If you live in an area with higher housing costs and where you take public transportation instead of driving your own car, that number can creep up to 30 percent. The key point is that if your combined home and car expenses are above 35 percent, after you consider taxes and other living expenses, it becomes really hard to save money for your all important emergency fund, big ticket items, and retirement.
Finally, when you do buy your home, consider a fixed rate mortgage such as a 15- or 30-year, fixed-rate mortgage. When you hear about the financial trouble that a lot of folks get into, it's largely related to "fancier" mortgages, such as adjustable rate and interest only mortgages. We suggest that you only consider an adjustable rate mortgage if you know with certainty that you are going to move before that rate adjusts. Finally, here's some tough love: If you can only afford your home with an interest only mortgage, you really can't afford it and your financial life will likely be better without it.
We wish you the best of luck. Keep these rules of thumb in mind and you'll be ahead of most when it comes to house hunting.