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August 30, 2002

Home, Expensive Home

Like credit card debt, home mortgages are the subject of a constant hard sell, but homeownership is different in its respectability. Friends are unlikely to send congratulations for maxing out a Visa card, but they will buy a drink to celebrate qualifying for a mortgage on the soon-to-be-purchased dream house. Even in the frenzy of modern credit use, there is a widespread feeling that credit cards are dangerous and that their overuse signals irresponsibility. Buying a home, by contrast, is rarely condemned and often applauded. ... Yet homeownership gets people into financial trouble in similar ways: They buy more than they can truly afford and they have too little margin left when disaster strikes.
      − from The Fragile Middle Class

Ever had a time in your life when, looking back, you realize how easily you could have done things just a bit differently, and REALLY screwed yourself over?

Back in 1996, when my wife and I purchased our first home, it would have been simple to sign our names on a larger mortgage than what we did. Subsequent years have proved to me that we did the right thing. I know now that taking on a larger mortgage would have created the single ugliest financial mess of our young lives.

I'm glad we had the sense to figure out ahead of time just what sort of a monthly house payment we could afford. I'm also glad we had the intestinal fortitude to insist that whatever house we purchased, the monthly payment could not be larger than "X" dollars − and we specified the "X" amount. Because heaven knows that if we had gone by what our realtor told us we could afford (which just happened to be the maximum amount we qualified for), then I promise you that we'd be in big trouble today.

If you haven't yet purchased a home but think it might be in your near-term future (perhaps within a year or so), then it's worth getting yourself prepared now.

Begin keeping all your monthly bills and statements.   Your lender will want to see at least six months' worth of current bills. And if you've been keeping them − and keeping them organized − then this will be a snap. (It'll probably impress the heck out of your mortgage representative, too.) These statements help the lending company make sure that you're keeping current on your payments with your gas company, electrical company, and all the other folks that you pay on a monthly basis.

Make sure your credit reports are ready to go.   Now would be a good time to get copies of your credit reports if you haven't done so within the last year. You'll want to make sure that everything listed there is as it should be, and that you can get any corrections made if they're necessary. If your report shows any late payments that you cannot refute, then you're going to need to write a short letter to your mortgage lender, explaining each occurrence.

Know WITHOUT A DOUBT how big a house payment you can afford.   It is imperative that you know your total monthly income and expected expenses, and that you are hard-edged, realistic, and deathly truthful with yourself about this. Once you take on that mortgage payment, it's going to be there for a long time. So if it turns out to be more than you can afford, then you've set yourself up for big trouble. Since realtors are paid on a percentage commission, it will be in their personal interests to get you in as high-dollar a house as your lender permits. But six months down the road, it won't be your realtor trying to scrounge together enough money to make the monthly payments. It'll be you.

Financial author and radio host Dave Ramsey recommends that for those folks who absolutely must have a home mortgage, the only financially wise option is a 15-year, fixed rate mortgage. Payments, he suggests, should equal no more than 25 percent of your household's take-home pay. Contrast this with FHA guidelines, which suggest that (1) borrowers' mortgage payments (principal, interest, taxes, and insurance) not exceed 29 percent of their household's gross (pre-tax) monthly income, and (2) that all borrowers' monthly debt payments, in addition to the mortgage payment, equal no more than 41 percent of their household's gross (pre-tax) monthly income. (Here's a good article on this topic, courtesy of Bankrate.com).

Know your local housing market.   Do some driving around. Hit some open houses. Surf through some research on the internet. Find out how much you can expect to pay for the style of home you'd like to own. Find neighborhoods you like (be realistic, please) and see what price range the homes sell for there. (It doesn't hurt to do this for neighborhoods you know you don't like, as well. You can save yourself unnecessary open-home visits.) Talk to locals: When these folks talk about how their home and property values have performed, it pays to listen. The difference between a stagnating home value and an escalating one can be as little as a twenty-minute drive from a big-city suburb to the nearby college town.

Get to know Home Depot (or Lowe's).   It helps to know going in just how much commonly-replaced home items are going to cost you when you need them (and you will). Kitchen sink faucets, hot-water heaters, circuit breakers and breaker boxes, lawn fertilizers and pest control agents ... all these items will need replacing from time to time. Try not to be unhappily surprised.

Start pricing (and saving for) the Big Peripherals.   Lawn mowers and edgers, clothes washing and drying machines, refrigerators, shelving units, assorted pieces of furniture − you're gonna need them all. So get ready. Become familiar with prices now. Start checking around, and see if you can pick up any of these items at reduced prices (Salvation Army and Goodwill stores; mower repair shops selling rebuilt units, etc.).

Build your funds for the down-payment and other fees.   Hopefully you've got some money set aside that can serve you here. Obviously, the bigger the down payment you can put together, the better off you'll be. And make sure you get a handle on all the assorted fees you'll be expected to pay during the home-browsing and home-buying processes.

Forget the common wisdom about home-buyers' tax advantages:   Your new home will be a liability.   That new home of yours won't generate income or capital gains for you until the day you sell it — if then. It will, however, be sucking money from your bank accounts every single month. Electrical bills and utility bills may also increase, and dramatically. Mortgage payments will almost certainly be larger than your previous rental payments. And now you'll have to worry about your home's lawn maintenance and roof maintenance and electrical maintenance and . . ..

As you can see, there are hundreds of financial angles to consider when you're looking at buying a home.   But the key to all of it − the key to truly enjoying your Home Sweet Home − is to keep your monthly mortgage payment manageable. That requires research, detailed knowledge of your current finances, and never-back-down planning.

And the only person who can accomplish that is you.

Michael | August 30, 2002
(Updated 2005-09-15)

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