Tuesday, March 1, 2011

The Best Time to Buy a Home, part 2

Yesterday, I mentioned the readiness factors for buying a home:
  • You have a steady income.
  • You are planning to stay in the house for a few years (or forever-ish).
  • You have no debt (or very little and will be paid off within a year).
  • You have an Emergency Safety Net that can carry you for several months.
  • If married, you have a healthy marriage.
  • You can afford the type of mortgage I will mention below.
  Assuming all of the readiness factors I mentioned above, you will want to purchase your home with:
  • a 15-year fixed-rate mortgage. 
 Why a 15-year mortgage?

Those of you who have paid on 30-year mortgages before will know that most of your monthly mortgage payment goes toward the interest on your loan and not toward paying off the house. I used to have a 30-year mortgage and would get kinda down that my mortgage balance didn't look much different after sending in several months of payments. The magic of 15-year mortgages is that each month you will see at least half of your money go toward your house and that will make an obvious dent in your mortgage balance.

One of the smartest financial moves we have made so far in our lives was moving our mortgage to a 15-year mortgage. Nearly every month, we see the 3rd digit in our 6-figure balance move down! That is motivating in itself, but the real benefit came when the real estate market dropped and home values crashed. Even though our home's value dropped $60,000, we still had $40,000 equity because our 15-year mortgage had lowered our loan balance so much in just 3 years!

All around us, my husband and I saw people who wanted to sell or refinance their homes but could not because their loans were bigger than their homes were worth. We were one of the few people in the neighborhood who were able to refinance our home at one of the historically low mortgage rates that accompanied the recession.

So, now that you are looking at a 15-year fixed rate mortgage, make sure your house payment will then be:
  • 25%-33% of your take-home pay. (To clarify, it is perfectly FANTASTIC to get a home payment that is LESS than 25% of your income.)
Any higher than a third of your income, and you're going to start feeling financially tight, also called being "house poor". If that term means nothing, imagine fighting more with your spouse about how "little money you have." It is pretty much the same thing.

If you read money articles or personal finance books, you will see that some experts state 45% of your income is "fine" to commit to a house payment, but they are not taking into consideration a lot of things, including tithing, which is at least 10% of your take-home pay (more for those who tithe on gross income). And like I mentioned yesterday, they don't take into account how many children you have or how much you need saved up for emergencies or whether you are saving up to replace your old car.

Twenty-five percent is ideal and 33% is the highest I recommend. I will not come by and egg your house if you decide to endure a higher percentage, although after a while, you might wish someone threw you some free eggs.

If you buy a home after checking in with the list above, the house will be a blessing, not a curse. The house will be a place of rest, not of unsurety. You will own your home, it will not own you.

Knowing where you presently stand financially is eye-opening.
Planning what needs to occur to get to home ownership brings confidence.
Acting on that plan looks suspiciously like courage.

The next time you are bugged by a well-meaning friend or relative about getting in the game of real estate, you will have greater confidence to let them know you will do it when you are ready. No further explanation is needed. And if you should ever drive past a billboard that says "Dad says it's time to buy," look Billboard Dad in the paper eye and say, "I'll do it when I'm good and ready!"


  1. Excellent post. I loved reading it. THere is such a big hype to buy a home right now that sometimes people don't stop to think about what they're doing. It takes a lot of courage to look dad (paper or real) in the eye and say "Not now". Thanks for posting the checklist. Wish I'd had one when we bought our first house. Luckily we had a friend who verbally told us the same thing.