The Home Stretch

The conventional wisdom tells us to stretch to buy as much house as possible. A lot of people who followed that advice in recent years through the help of adjustable rate mortgages (ARMs) are now feeling some pain from all that stretching. With interest rates now rising, it’s not uncommon for people to see their monthly payments shooting up 40% or more. On 7/2, The Chicago Tribune quoted a research economist at the Real Estate Center at Texas A&M University who recommended that anyone with an ARM should refinance into a fixed rate mortgage within the next 18 months.
h3(matt). Matt’s View
p(matt). Switching to a fixed rate now will help avoid the pain of future rate hikes. However, it will likely come with a higher monthly payment than people with an ARM were paying at the beginning of their loans. And some people won’t qualify for a new loan, so if they can’t afford the higher payments, they may have to sell their home or risk losing it through foreclosure.
p(matt). Two rules of thumb regarding home buying: First, don’t buy unless you can afford a down payment of at least 20%, and second, don’t take out a mortgage for over twice your household’s annual realized income. The second guideline is from the authors of “The Millionaire Next Door,” a fascinating look at the habits of the truly wealthy. Both recommendations probably seem radical in an era when 100% financing has become common. But making sure your mortgage is manageable is important if you want to do something even more radical, like build savings.

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