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:
- Save $10,000 in an Emergency Fund (circa Dec 2010)
- Max out Retirement Accounts (2011 and on)
- Save for a Wedding (2011)
- Save for a New car (2011/2012)
- 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.