Buying a house is dream-come-true for many families, yet there are many families each month in Bexar County that experience the nightmare of foreclosure. These days, I see people in my office each week that are having trouble paying for their house that they bought just a few years ago. Part of the problem in most cases is that the household income decreased and they can no longer afford the house payment. The other part of the problem in most cases is that they “bit off more than they could chew.”
In regard to the first part of the problem, that of a decrease in income, the only way to protect yourself in that type of situation is to make sure that you: 1) only purchase a home if it is a really good deal, 2) make a large down payment on your house, and 3) make sure you have 3 to 6 months of living expenses as an emergency reserve, like Dave Ramsey suggests.
In regard to the second part of the problem, that of buying more house than you can really afford, here are some tips that may help you avoid the nightmare of foreclosure:
The first point is that it is perfectly okay to be married and rent until your finances are strong enough to allow you to purchase a house easily. Many people have the view that paying rent is wasting money, but having a 30-year home mortgage is very much like paying rent. Especially for the first ten years. So, take some time to prepare and make a careful choice.
Next, no more than 25 to 30 percent of your take-home pay should be spent on house payments, property taxes, homeowners insurance and homeowners’ association fees. One big reason for that rule is that I seldom see people in my office for a debt consultation where there housing expense is only 25 to 30 percent of their income.
Some of my friends in the real estate industry like to challenge my thinking on this by pointing out that you get a tax deduction for mortgage interest, which they think justifies buying big. I disagree because it is not a good deal to pay a dollar in interest and get maybe 20 cents back on your income taxes. A good deal would be when you invest a dollar and a year later you get back $1.20.
Another important factor is to make sure that you get a 15-year mortgage rather than a 30-year mortgage. A 15-year mortgage will have a better interest rate, and although a 15-year mortgage can result in a higher monthly payment, you can avoid that problem by making a large down payment so that you avoid having to pay private mortgage insurance (PMI).
When you buy a house, you must have a down payment equal to 20 percent of the purchase price, or you have to pay for private mortgage insurance (PMI), which essentially increases your monthly payment. So, if the choice is to hurry up and buy a house with a 30-year loan and PMI versus waiting and buying with a 15-year loan with a 20 percent down payment, you’re probably going to do much better by waiting.
Also, 7.5 years into a 15-year mortgage means you’re half way done, whereas 7.5 years into a 30-year mortgage and you’re lucky if you will break-even in the event you have to sell your house.
