Whether you’ve been through the house buying process or not, you have probably dreamed of owning your own house or at least property of some sort. But when we dream of our first house, we dream of something really nice in a nice neighborhood, comparable to what our parents live in now. Ah but we forget that our parents were also just starting out in life once before, and they didn’t have anything as nice or as expensive as they have now. They worked up to that house they have now. Perhaps they set a bad example and they can’t afford that house either. Whether you had a bad example or just have pipe dreams, neither are an excuse to get a house you can’t afford the mortgage payments on.
Owning property is a good thing. It’s the one solid investment you can make even if you just own land. Over time, the value will increase. The real value is in the land. The building you put on it or that has been put on it already is just adding value. But the land itself will never loose its value. If you bought a piece of property with a house that you found was worthless and needed to be torn down, it is your responsibility to be aware of the condition of the structure on the land before agreeing to buy it.
When you make that plunge, mortgage brokers or banks will tell you what their formula says you can afford based on your income, your debts, and your monthly liabilities (bills). But you see, they don’t ask how much do you spend eating out or buying clothes or going to the movies. They just want to know that you will have money left over for food after your mortgage payment and bills. They don’t care if you put money in savings every month or want to put money in savings every month. Their commission is made on the size of mortgage they sell you. It is your responsibility to set the limit on what you can actually afford. No one expects you to have a 2500 square foot house the first time around. They just expect you to pay your bills each month and not become a drain on the economy.
Here’s the other thing you must consider. Depending on where you live, home values can be outrageously high and volatile, or reasonable with slow and steady growth. In some markets, it’s perfectly acceptable to take out an interest only loan. Here’s my rule on that. If you can’t make a payment that includes the principle loan amount as well as the interest on the loan, you can’t afford it. I don’t care if it’s a hot market and you’re convinced 3-5 years from now you will be able to sell it for $50,000-$100,000 more than what you “paid” for it. That’s a risk. What if home values drop dramatically? You are then stuck there paying interest on a loan worth more than the house.
That leads me to my next rule. If your income is not outrageously high to afford the volatility of the “markets” out there, only take out fixed rate loans. This means that the interest rate you pay will stay the same for the term of the loan unless you refinance. The only change in your monthly house payments will be on your property taxes and insurance. Those of you that can’t afford a down payment on the house but can afford 2 mortgage payments, you can get both loans fixed. Fixed rate loans will keep you out of trouble later.
When you have a loan that you are systematically paying on the principle, you are building equity. In essence it’s like a savings account. It’s just not a very liquid savings, but when you are paying rent or interest only, you are not building ownership or equity. You are throwing all of that money down the drain. Just start out with something reasonable and within your means. Only you know what that is. Don’t get caught up in the process of looking for a house either. You’ll find a yard you like or a house that appeals to your emotions and that’s when you can get in trouble. Keep logic at the forefront when going through the process. Set a maximum you can afford and a preferred amount. Sometimes you’ll find that houses at the maximum need more work than houses in the preferred range. Use logic. You can always trade up later on when you have the means to.