Debt Free Thoughts on Mortgages

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The other day a reader emailed me this:

i would love for you to do a post on what you think about real estate – your blog seems to announce that you do not ever want to be in debt, and i was wondering what your future plans for renting/buying are!

That is an excellent question. Honestly I haven’t put too much thought into it because I probably won’t buy a house for years. My financial priorities go like this:

  1. Save $10,000 in an Emergency Fund (circa Dec 2010)
  2. Max out Retirement Accounts (2011 and on)
  3. Save for a Wedding (2011)
  4. Save for a New car (2011/2012)
  5. Save for a House Deposit (2012-??)

Man! That seems like a loooong time! :( Perhaps I can knock out the first goals faster than expected? Hmm. But back to the question at hand: While I am very much against debt, I do plan to take out a mortgage when I buy a house. I’d love to buy a home with cash only (can you imagine?!) but realistically that probably won’t happen unless I win the lottery or marry rich.

I’ve got a little time before I will be saving for the deposit, but here are my debt-free thoughts on mortgages for when that time comes.

1. Rent Cheap
A lot of people have the mentality that renting is wasting money because you are throwing away cash that could be put towards equity. Well, that is technically true, but it can be a dangerous mentality if it rushes you into buying a house you can’t afford. It is, however, a good motivator to save faster and the easiest way to save faster is to rent cheap. I think that monthly housing costs should be no more than 35% of your paycheck. My rent right now is 26% of my paycheck (33% if you count bills) and I hope to stay around that no matter where I live. You don’t have to live in the ghetto to rent cheap, but some ways to save on rent include splitting rent with a roommate, renting away from city life (make sure to factor transportation costs), and sacrificing amenities like washer/dryer, dishwasher, etc. That topic really could be a whole post in itself.

2. Save 20% Down Payment
Mortgage lenders vary on the amount of cash they require for down payments, but I plan to save for a 20% deposit when I buy.

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  • Dave Ramsey also suggests that your house payment on that 15 year mortgage not be more than 25% of your income. I am in a similar situation, still saving 6 months of living expenses, but I plan to save for a down payment before new car, etc. Its great that you have this stuff figured out BEFORE getting married – if I had I might STILL be married, lol.

  • I don’t know. I think I’m in financial shape to buy something in the next year or so, but I’m really scared! I’m not sure if I’m ready and it is SO expensive in DC!

  • I did a post on the same topic recently. While I’m not in the financial position to buy quite yet, I very much want to own a place! Boyfriend and I are starting to work with a realtor, so that when we are financially ready to buy, we’ll also be very well versed in real estate, and we’ll know when we’re getting the best deal. Sadly, living in Southern California means that we’ll be paying a LOT of money for a small place :-/

  • I think you need to save a little more than 20%. Especially in today’s economy’s, banks aren’t as generous as they once were. If you just have 20% saved, they may waver on extending the loan to you. Furthermore, you have to consider closing costs, maintenance, and taxes. To be safe, I’d save up 30% so you know for a fact that you are covered. Maybe I’m a little shaken from this mortgage crisis (I work directly with it in the Insurance industry), but I’ve seen well-to-do people struggle to find houses even if they had a good amount down!

    The mentality on the 15 year mortgage is so spot on and this really needs to be emphasized. I think it is ok to take the 30 year mortgage as long as you can make 15-year-mortgage payments. I plan on taking a 30 year, but making 15-year-mortgage payments (if I can negotiate a no-penalty early payment clause). I always figure, just in case something happens and I need to divert money to that, at least I’m not going to be behind my mortgage payments.

  • It amazes me that you guys have fixed rates for such long terms. here, you can’t lock a rate in for longer than 5, I think, which makes house buying much scarier.

    I guess my savings priorities go something like, $10k EF, increase retirement, do some travelling, and then really ramp up saving for a deposit. I don’t really drive and never had a car, so hopefully T and I can remain a one-car household (until we have kids, maybe?) I do benefit from having a vehicle though, so I’d be helping with the purchase of our next car as always.

  • You’re such a smart gal! I want to save 20% too. My husband and I won’t be buying for at least 4 years because he’s in the military and we won’t buying while we’re enlisted.

  • I’m in the process of buying my first house with my fiancee. We decided to put 5% down and have the cash to cover closing costs, moving expenses, and still have a 3 month emergency fund. It is VERY scary committing to spending that much money….but my thought process is more on the line that when we rent, we do throw our money away. Especially living in Boston, where the cost of renting is only slightly lower than the cost of a mortgage.

    Fortunately, we are both big savers and financially responsible. I am picking up extra nursing shifts and he has returned to his college past time of caddying for this spring and summer. This extra money plus the 8000 tax credit will allow us to boost our savings back to 8 mos. expenses by the end of the summer! YAY!

    We’ve been laughing a lot about how we’ll be living in an empty house, because we are not spending money on furniture or home decor until we have our 8 month emergency fund back!

    I guess what I’m saying is it’s a BIG committment, but entirely possible if you handle your finances well!