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The Right Way to Buy a House
There has been a lot of coverage in the news lately about the housing market in the United States and globally. After a spectacular run in prices that lasted about 10 years, the housing market is cooling and many experts are predicting a continued multi-year decline in prices. Now may be a good time to learn from what has happened.
Much of the housing “problem” today can be linked to some buyers overpaying for their homes and overextending their finances to purchase these homes. While 100%+ financing is not a good idea paying all cash for a house is not a good idea either. Let’s take a look.
The best way to buy a home is to ensure that you save money each and every month after paying all of your living expenses, ideally from the lesser of two incomes if you have two incomes. Furthermore, you need to ensure that you are saving enough as outlined in the article entitled, How to Save.
Let’s say that Dave and Sally are considering buying a home and they take home $5,500 a month after taxes. Sally takes home $3,000 a month and Dave takes home $2,500 a month. If they buy a home where all costs would be $4,000 a month then they save $1,000 a month. That means that they need to save for 5 months (5 * $1,000 = $5,000) to equal 1 month of living expenses. And, it takes two incomes for them to do so. Many financial experts would say that Dave and Sally are overextending themselves.
If they purchased a home where the money expenses are $2,000 a month they would be in much better shape. If Sally lost her income then Dave could still pay $2,000 a month for living expenses and he would save $500 a month. Not an ideal situation but certainly not the painful experience that many homeowners are currently going through.
This rational should dictate how large your mortgage is. A mortgage is a good idea as it provides some leverage and improves your return. However, a large mortgage will consume too much of your monthly income and will not allow you to save enough each month. Putting 20% down at purchase is a good idea and has been time tested.
Buy a home that you can afford on the lesser of two incomes (if you have two incomes) and make sure to save enough each month to build your savings so that you can cover your monthly expenses for 6 to 12 months.
If everyone had followed this advice then house prices would not have gotten out of control as they did in many areas and prices in these areas would not be falling like they are.
There are many opportunities to invest and speculate in life. There is no reason to do so with your house. At the end of the day it is not really an investment, it is your home.