Thinking about buying your first house? Well, before you commit, construct a plan.
Maybe you’ve heard the old “one fourth” rule about how much house to buy. That’s the rule of thumb that recommends not committing yourself to a mortgage any greater than one fourth of your household income.
The “one fourth” rule of thumb for a home mortgage is a good place to start, but it can lure a couple into the false sense of security, that they’re okay, if they just follow that rule.
But, you can’t know if the house you’re thinking of buying is affordable unless you evaluate that purchase in the context of your overall financial plan. If, like most people, you don’t have a plan, how can you know if something is affordable?
In order of priority, here are the components of a reasonable financial plan any young couple should have, especially if they have children.
Protect yourselves. Anyone earning an income should be covered with life insurance and disability insurance. Work with an experienced, licensed agent to determine the amounts. Make sure you understand their recommendations. They should make sense to you.
Number two, save first, then spend the leftovers. I know someone is in trouble when they tell me they will start saving later when they’re making more money. Somehow, that day never comes. If you pay yourself first, you are much more likely to be successful on the next point.
Avoid non-mortgage debt. Consumer debt is borrowing money to buy something that will be gone one day, including a car. I know, I know, “everyone” borrows money to buy a car. I simply recommend that you don’t buy a new car using debt, even if it’s zero percent financing. If you don’t have the cash to buy a new car, you can’t afford a new car.
In housing, start small and grow. The single most significant “choke factor” I see in young couples’ lives is when they buy their “dream home” at the age of twenty-eight, because the interest rates are low and they can “afford it.” If affording it means they can pay the monthly payment, maybe they can. But it usually also means they are saving next to zero. Not good.
Assume your assumptions are wrong. When someone is looking at a home, my counsel is to make the best estimate you can for what the cost of maintaining that home will be, then add the twenty-five percent. Over buying and underestimating are major causes of financial stress.
Avoid comparison. If you take your cues from what all your friends are doing, you’ll pick up some bad habits and miss some key lessons.
What is your real goal? Do you want a happy, low-stress, financially stable family?
Focus on your family’s plan to get there and make sure that plan is balanced. It will go a long way towards making any new house, a happy home.
