On My Own Two Feet coauthor Manisha Thakor helps you decide if purchasing a home in the current market is a good idea for you and your spouse.
There may be a reason the old playground rhyme “First comes love, then comes marriage, then comes the baby in the baby carriage” omits a line about buying a home. Most couples long for a dream home, but owning one isn’t always a smart use of their finances and resources, especially given the current “crisis” state of the housing market.
It has been accepted wisdom in the past that renting is the equivalent of throwing your money away, but Thakor notes there are exceptions to this rule: “Many people forget there are high transaction costs associated with buying and selling a home.” If you consider the expenses that ownership brings -- and renters avoid -- including property taxes, homeowner insurance and maintenance, you may decide renting is right for you.
However, if buying a home is in line with your finances and 5- to 10-year plan, Thakor offers this simple, five-step process to complete before even glancing at real estate listings:
- Step 1: Know what your household income is and agree not to spend more than one-third on total housing-related costs.
- Step 2: Wait until you can afford a 20 percent down payment. It may sound old-fashioned, but it’s excellent protection financially and mentally.
- Step 3: Don’t try to keep up with your friends and coworkers. The vast majority of them are likely financially clueless.
- Step 4: If you think you’ll move in less than five years, be VERY sure that you’re buying into a strong housing market. Closing and selling costs will take a big bite out of your finances.
- Step 5: Don’t be afraid to talk about money. All too often in relationships it becomes the pink elephant in the room.
Now that you’ve gone through the five-step process (you did go through the process, right? If not, we strongly advise you to go back and read it), you may feel ready to buy a home. Even if you’re 100 percent certain that home ownership is the right decision for you and your spouse, it’s important not to rush into it. To find out what you can afford, determine if your total housing costs (mortgage, insurance, property tax, upkeep, utilities, etc.) are more than one-third of your income. If they are, you may not have enough money left over to save for the future. To figure out your monthly payments, check out our Mortgage Calculator.
In light of the recent subprime mortgage crisis, you may be wondering why anyone would ever get an adjustable rate mortgage. Thakor says there’s a very specific circumstance in which you should consider an adjustable rate: “Think about getting one if you know for SURE you’re going to move before the rate resets. For instance, if your company transfers you for a prespecified six-year job, a 7/1 ARM could make sense.” If this example describes your current situation or if you have back-loaded income, you may want to consider an adjustable-rate or interest-only mortgage.
Most importantly, you and your spouse are probably wondering if the housing crisis has bottomed out. Thakor suspects that, as far as the market’s fallen, we have yet to land. “I think we still have another year or so to go. Many homeowners are still clinging on to hope that they’ll be able to sell their homes for prices that are close to what they paid,” she says. That said, what’s a bane to sellers is a boon to buyers. Those looking to acquire property are in prime position; just proceed with caution to ensure you don’t wind up like the thousands of couples who bought their dream home and have now watched it slip away along with their savings and credit ratings.
Click here for more home buying advice.
-- Sean Cunningham
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