Buyers have brought a large mortgage at the expenses of their emergency funds, their IRA contributions, company pension plans, even their college savings. [Tamara McAleese, Get Rich Slow]
I guess the rule of thumb, is not to buy a large house. So what is considered large?
I can use Dave Ramsey advice: "Buy a house where the monthly payment is no more than 25% of your take home pay on a 15 year fix mortgage."
I can also go The Millionaire Next Door method:
"If you want to be wealthy buy a home no more than twice your annual income."
I guess our choice will be easier, if we didn't want to be wealthy. We could just get a 50 year fixed or a 2/28 ARM mortgage with no down payment.
It's harder when you want to do things correct....arrrrgh.
10 cool comments:
A large house could produce your future financial wealth!
Rent out as many rooms as possible! Convert "extra" rooms to bedrooms!
Use your home to maximize income!
That's a good alternative, but what happens when someone move out, or cannot pay.
Landlord is no guarantee income
Plus I hate living with people I do not know, (no privacy)
A mid sized home at a comfortable payment is what I like
Ah, I actually live in such a house, and the owners have a great business plan!
They rent rooms by the WEEK which makes it very easy to fill them. Desperate broke people like me, with just enough money to move in - and not nearly enough money to move into a MONTHLY rental - flock here as it's just about our only option.
In my case, my income is just sufficient to keep paying the weekly rent, but not enough to save up any money to move to a cheaper place. So they've got me for as long as it takes me to save up enouigh money to move!
I've lived here several months and their vacancy rate appears to be in the range of 5-10 percent. Yes there is a lot of turnover but it never takes them more than a few days to re-fill a room.
i don't plan on following dave's or the millionaire next door's advice. it's not because i don't think it's good advice. it's more because i know that i can afford more than that and still meet my goals. if i were to follow those rules i would have to do one of two things: either wait to get my home or move to a bad neighborhood. my answer to both is nope. because i'm good at managing my money, i'm in favor of the third option: not taking that advice.
that said, i'm not borrowing as much as i'll qualify for. i'm not aiming to get more than i need from a house (i take the term "starter house" literally.) i'm also not compromising on putting enough down on the place.
We have a nice home now, I just want to move slightly up in house ( a basement, bigger kitchen)
This time around I want a 15 year fix rate with a comfortable payment so we can knock the mortage out in 10 years.
@ Money Monk,
In addition to buying a less costly house, I've used a larger downpayment or having a friend be a roommate(for about a year) to reduce monthly housing payments.
the millionaire next door rule of buy home no more than 2x your take home pay and on a fixed 15 at that would mean that we would never buy a home.
I think this rule is too extreme. unrealistic, and oversimplifies the decision.
The rule that makes more sense is debt to income ratio and taking a good hard look at one's goals, lifestyle, and trade-offs willing to be made.
There's value in buying a home you cherish as long as you realizing part of the trade off may be going out every night, vacations wherever you want, and a current of the moment wardrobe.
just my 2 C
"Twice yearly income" rule was used by the banks when I bought my first two places. But this rule was based on 9% interest rate which was prevalent at the time. When the interest rate is less, higher amount would result in same interest payments. With 4.5% you could probably go as high as 3 times.
I don't agree with 15 years rule. I don't see anything wrong with 30 year mortgage especially if the interest rate is good. You can always pre pay later. If you get a good rate, the inflation is likely to reduce your payments significantly with time. You don't want to have mortgage in retirement, but if you are young and expect salary growth it makes sense. When I had mortgage before, the payments became less and less relative to my income with time.
My friend is now buying a vacation home. They are pretty well off - he is a dentist she - an engineer, over 2-3M net worth. He is pretty smart with investments too -- e.g. they sold stocks last year at the top, they bought gold a few years ago for less too. Wish I listened to them. They are not huge spenders either, my friend buys her clothes at TJ Maxx and Annie Sez. Yet when I asked her if they buy the vacation home for cash that they certainly have, she told that they believe with the inflation we have and likely to have in future it makes sense to take a mortgage.
@ finance girl- depending on where you live, the rule can fit.
However, I always wanted to be a goal to have a paid for home before our child goes to college.
I just do not want to skips other goals because of a mortgage is in the way.
@ kitty, your friends are doing very well.
As well as homeownership, I also invest in stocks.
Some condos in the Caribbean range from $120K -150K 1 and 2 bedrooms. I may do a vacation home to flip or to live in within 5 yrs.
I just think when you have a bigger home- taxes, electric HOA fees and insurance all can put a burden on you.
I want to move up in home, but not to the point I cannot save, invest or have fun.
I know plenty people that have a nice home and yet cannot furnish it or go anywhere for vacations because of debt and high mortgages.
I do not want to be in that number
Every time I think of buying a bigger house or getting closer to the max amount they'll let me borrow, I think about taxes, insurance, utilities, maintenance, and the longer commute. That sobers me right up!
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